Hong Tai Electric Industrial's (TPE:1612) Returns On Capital Are Heading Higher

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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. Analysts use this formula to calculate it for Hong Tai Electric Industrial:

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

0.056 = NT$309m ÷ (NT$6.1b - NT$611m) (Based on the trailing twelve months to December 2020).

Therefore, Hong Tai Electric Industrial has an ROCE of 5.6%. Ultimately, that's a low return and it under-performs the Electrical industry average of 7.5%.

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 want to delve into the historical earnings, revenue and cash flow of Hong Tai Electric Industrial, check out these free graphs here.

The Trend Of ROCE

We're delighted to see that Hong Tai Electric Industrial is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 5.6% on its capital. Not only that, but the company is utilizing 20% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

The Key Takeaway

Overall, Hong Tai Electric Industrial gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Since the stock has returned a staggering 371% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Hong Tai Electric Industrial can keep these trends up, it could have a bright future ahead.

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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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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