Returns On Capital - An Important Metric For Hua Eng Wire & Cable (TPE:1608)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Hua Eng Wire & Cable (TPE:1608) and its trend of ROCE, we really liked what we saw.

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 Hua Eng Wire & Cable is:

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

0.0084 = NT$71m ÷ (NT$12b - NT$3.3b) (Based on the trailing twelve months to September 2020).

Therefore, Hua Eng Wire & Cable has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 7.1%.

Check out our latest analysis for Hua Eng Wire & Cable

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 Hua Eng Wire & Cable's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

We're delighted to see that Hua Eng Wire & Cable is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 0.8%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

Our Take On Hua Eng Wire & Cable's ROCE

In summary, we're delighted to see that Hua Eng Wire & Cable has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a solid 91% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to continue researching Hua Eng Wire & Cable, you might be interested to know about the 2 warning signs that our analysis has discovered.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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