Rexon IndustrialLtd (TPE:1515) Is Very Good At Capital Allocation

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Speaking of which, we noticed some great changes in Rexon IndustrialLtd's (TPE:1515) returns on capital, so let's have a look.

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. To calculate this metric for Rexon IndustrialLtd, this is the formula:

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

0.24 = NT$890m ÷ (NT$8.0b - NT$4.3b) (Based on the trailing twelve months to September 2020).

So, Rexon IndustrialLtd has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 9.3% earned by companies in a similar industry.

See our latest analysis for Rexon IndustrialLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Rexon IndustrialLtd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Rexon IndustrialLtd, check out these free graphs here.

How Are Returns Trending?

Rexon IndustrialLtd's ROCE growth is quite impressive. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 301% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

Another thing to note, Rexon IndustrialLtd has a high ratio of current liabilities to total assets of 53%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

To sum it up, Rexon IndustrialLtd is collecting higher returns from the same amount of capital, and that's impressive. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Rexon IndustrialLtd can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 1 warning sign with Rexon IndustrialLtd and understanding this should be part of your investment process.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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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