There Are Reasons To Feel Uneasy About World Known MFG (Cayman)'s (TPE:4581) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at World Known MFG (Cayman) (TPE:4581) and its ROCE trend, we weren't exactly thrilled.

What is 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. The formula for this calculation on World Known MFG (Cayman) is:

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

0.084 = NT$78m ÷ (NT$1.3b - NT$411m) (Based on the trailing twelve months to December 2020).

So, World Known MFG (Cayman) has an ROCE of 8.4%. On its own that's a low return, but compared to the average of 4.5% generated by the Auto Components industry, it's much better.

View our latest analysis for World Known MFG (Cayman)

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

What Does the ROCE Trend For World Known MFG (Cayman) Tell Us?

On the surface, the trend of ROCE at World Known MFG (Cayman) doesn't inspire confidence. Around four years ago the returns on capital were 16%, but since then they've fallen to 8.4%. 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.

Our Take On World Known MFG (Cayman)'s ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for World Known MFG (Cayman) have fallen, meanwhile the business is employing more capital than it was four years ago. However the stock has delivered a 9.7% return to shareholders over the last year, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

World Known MFG (Cayman) does have some risks, we noticed 4 warning signs (and 1 which is concerning) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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