Will Sanyang Motor's (TPE:2206) Growth In ROCE Persist?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher 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.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Sanyang Motor, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.065 = NT$1.5b ÷ (NT$44b - NT$20b) (Based on the trailing twelve months to September 2020).

Therefore, Sanyang Motor has an ROCE of 6.5%. In absolute terms, that's a low return, but it's much better than the Auto industry average of 5.2%.

View our latest analysis for Sanyang Motor

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sanyang Motor's ROCE against it's prior returns. If you're interested in investigating Sanyang Motor's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Sanyang Motor Tell Us?

Shareholders will be relieved that Sanyang Motor has broken into profitability. The company now earns 6.5% on its capital, because five years ago it was incurring losses. 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. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

On a side note, Sanyang Motor's current liabilities are still rather high at 46% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Sanyang Motor's ROCE

As discussed above, Sanyang Motor appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And with a respectable 96% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Sanyang Motor can keep these trends up, it could have a bright future ahead.

Sanyang Motor does have some risks, we noticed 4 warning signs (and 2 which are a bit concerning) we think you should know about.

While Sanyang Motor may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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