What Do The Returns At Hua Eng Wire & Cable (TPE:1608) Mean Going Forward?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher 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.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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).

Thus, 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%.

See our latest analysis for Hua Eng Wire & Cable

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

What Can We Tell From Hua Eng Wire & Cable's ROCE Trend?

Shareholders will be relieved that Hua Eng Wire & Cable has broken into profitability. The company now earns 0.8% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Hua Eng Wire & Cable has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. 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

As discussed above, Hua Eng Wire & Cable appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a final note, we've found 2 warning signs for Hua Eng Wire & Cable that we think you should be aware of.

While Hua Eng Wire & Cable 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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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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