Ju-Kao Engineering (GTSM:1594) Is Doing The Right Things To Multiply Its Share Price

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Ju-Kao Engineering (GTSM:1594) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Ju-Kao Engineering is:

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

0.15 = NT$65m ÷ (NT$715m - NT$290m) (Based on the trailing twelve months to June 2020).

So, Ju-Kao Engineering has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 8.0% generated by the Construction industry.

See our latest analysis for Ju-Kao Engineering

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're interested in investigating Ju-Kao Engineering's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Ju-Kao Engineering's ROCE Trend?

Ju-Kao Engineering is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 15%. The amount of capital employed has increased too, by 35%. So we're very much inspired by what we're seeing at Ju-Kao Engineering thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Ju-Kao Engineering has a current liabilities to total assets ratio of 41%, which we'd consider pretty high. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Ju-Kao Engineering's ROCE

All in all, it's terrific to see that Ju-Kao Engineering is reaping the rewards from prior investments and is growing its capital base. Since the stock has only returned 23% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

One more thing to note, we've identified 3 warning signs with Ju-Kao Engineering and understanding these should be part of your investment process.

While Ju-Kao Engineering 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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