What We Make Of Ju-Kao Engineering's (GTSM:1594) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So on that note, Ju-Kao Engineering (GTSM:1594) looks quite promising in regards to its trends of return on capital.

What is Return On Capital Employed (ROCE)?

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. To calculate this metric for Ju-Kao Engineering, this is the formula:

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).

Therefore, Ju-Kao Engineering has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 7.5% generated by the Construction industry.

View 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 Does the ROCE Trend For Ju-Kao Engineering Tell Us?

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 company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 35%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Another thing to note, Ju-Kao Engineering has a high ratio of current liabilities to total assets of 41%. 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.

What We Can Learn From Ju-Kao Engineering's ROCE

To sum it up, Ju-Kao Engineering has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Considering the stock has delivered 6.9% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

If you want to continue researching Ju-Kao Engineering, you might be interested to know about the 2 warning signs that our analysis has discovered.

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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