If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Sanyang Motor (TPE:2206) so let's look a bit deeper.
Return On Capital Employed (ROCE): What is it?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Sanyang Motor is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.077 = NT$2.0b ÷ (NT$44b - NT$19b) (Based on the trailing twelve months to December 2020).
Thus, Sanyang Motor has an ROCE of 7.7%. On its own that's a low return, but compared to the average of 3.6% generated by the Auto industry, it's much better.
Check out our latest analysis for Sanyang Motor
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Sanyang Motor, check out these free graphs here.
The Trend Of ROCE
We're delighted to see that Sanyang Motor is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 7.7%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.
Another thing to note, Sanyang Motor has a high ratio of current liabilities to total assets of 42%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Key Takeaway
In summary, we're delighted to see that Sanyang Motor has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a staggering 103% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
One more thing to note, we've identified 2 warning signs with Sanyang Motor and understanding them should be part of your investment process.
While Sanyang Motor isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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About TWSE:2206
Sanyang Motor
Manufactures and sells automobiles, locomotives, and their parts in Taiwan, China, Asia, Europe, and internationally.
Excellent balance sheet average dividend payer.
