Returns On Capital At Far Eastern New Century (TPE:1402) Paint A Concerning Picture

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Far Eastern New Century (TPE:1402) we aren't filled with optimism, but let's investigate further.

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. 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%. Ultimately, that's a low return and it under-performs the Industrials industry average of 5.1%.

Check out our latest analysis for Far Eastern New Century

In the above chart we have measured Far Eastern New Century's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Far Eastern New Century here for free.

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at Far Eastern New Century. About five years ago, returns on capital were 3.2%, however they're now substantially lower than that as we saw above. 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. Despite the concerning underlying trends, the stock has actually gained 34% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you want to know some of the risks facing Far Eastern New Century we've found 3 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

While Far Eastern New Century isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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