There Are Reasons To Feel Uneasy About Cub Elecparts' (TPE:2231) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Cub Elecparts (TPE:2231) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Cub Elecparts:

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

0.081 = NT$387m ÷ (NT$7.5b - NT$2.7b) (Based on the trailing twelve months to December 2020).

Thus, Cub Elecparts has an ROCE of 8.1%. In absolute terms, that's a low return, but it's much better than the Auto Components industry average of 4.5%.

View our latest analysis for Cub Elecparts

Above you can see how the current ROCE for Cub Elecparts compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Cub Elecparts here for free.

What Can We Tell From Cub Elecparts' ROCE Trend?

When we looked at the ROCE trend at Cub Elecparts, we didn't gain much confidence. Around five years ago the returns on capital were 45%, but since then they've fallen to 8.1%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 36%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for Cub Elecparts have fallen, meanwhile the business is employing more capital than it was five years ago. In spite of that, the stock has delivered a 2.6% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Cub Elecparts (including 1 which shouldn't be ignored) .

While Cub Elecparts 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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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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