Our Take On The Returns On Capital At Chang Jia M&E Engineering (GTSM:4550)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Chang Jia M&E Engineering (GTSM:4550), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Chang Jia M&E Engineering is:

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

0.054 = NT$45m ÷ (NT$1.5b - NT$700m) (Based on the trailing twelve months to September 2020).

Therefore, Chang Jia M&E Engineering has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 7.5%.

Check out our latest analysis for Chang Jia M&E Engineering

Historical performance is a great place to start when researching a stock so above you can see the gauge for Chang Jia M&E Engineering's ROCE against it's prior returns. If you'd like to look at how Chang Jia M&E Engineering has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Chang Jia M&E Engineering's ROCE Trend?

When we looked at the ROCE trend at Chang Jia M&E Engineering, we didn't gain much confidence. To be more specific, ROCE has fallen from 9.4% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Chang Jia M&E Engineering'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.

What We Can Learn From Chang Jia M&E Engineering's ROCE

While returns have fallen for Chang Jia M&E Engineering in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Furthermore the stock has climbed 63% over the last five years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

On a final note, we've found 3 warning signs for Chang Jia M&E Engineering that we think you should be aware of.

While Chang Jia M&E 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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