Here’s What’s Happening With Returns At Hong Tai Electric Industrial (TPE:1612)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. With that in mind, we've noticed some promising trends at Hong Tai Electric Industrial (TPE:1612) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Hong Tai Electric Industrial, this is the formula:

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

0.048 = NT$250m ÷ (NT$5.8b - NT$568m) (Based on the trailing twelve months to September 2020).

Thus, Hong Tai Electric Industrial has an ROCE of 4.8%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 7.1%.

View our latest analysis for Hong Tai Electric Industrial

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 Hong Tai Electric Industrial's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Hong Tai Electric Industrial's ROCE Trend?

Shareholders will be relieved that Hong Tai Electric Industrial has 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 4.8%, which is always encouraging. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. 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. Because in the end, a business can only get so efficient.

The Bottom Line

To bring it all together, Hong Tai Electric Industrial has done well to increase the returns it's generating from its capital employed. And a remarkable 165% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you'd like to know about the risks facing Hong Tai Electric Industrial, we've discovered 3 warning signs that you should be aware of.

While Hong Tai Electric Industrial 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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