Is Far Eastern New Century (TPE:1402) Headed For Trouble?

What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after we looked into Far Eastern New Century (TPE:1402), the trends above didn't look too great.

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. Analysts use this formula to calculate it for Far Eastern New Century:

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

0.02 = NT$9.6b ÷ (NT$606b - NT$126b) (Based on the trailing twelve months to September 2020).

Therefore, Far Eastern New Century has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Industrials industry average of 5.6%.

Check out our latest analysis for Far Eastern New Century

Above you can see how the current ROCE for Far Eastern New Century compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

In terms of Far Eastern New Century's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 3.2% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Far Eastern New Century to turn into a multi-bagger.

Our Take On Far Eastern New Century's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. In spite of that, the stock has delivered a 35% 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 3 warning signs we've spotted with Far Eastern New Century (including 1 which is significant) .

While Far Eastern New Century 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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