Returns On Capital At Yuan Jen EnterprisesLtd (TPE:1725) Paint An Interesting Picture

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after investigating Yuan Jen EnterprisesLtd (TPE:1725), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Yuan Jen EnterprisesLtd, this is the formula:

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

0.039 = NT$128m ÷ (NT$5.2b - NT$1.9b) (Based on the trailing twelve months to September 2020).

Therefore, Yuan Jen EnterprisesLtd has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 12%.

Check out our latest analysis for Yuan Jen EnterprisesLtd

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 Yuan Jen EnterprisesLtd, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Yuan Jen EnterprisesLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 6.5% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On Yuan Jen EnterprisesLtd's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Yuan Jen EnterprisesLtd have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 48% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Yuan Jen EnterprisesLtd does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

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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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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