Returns On Capital At Run Long ConstructionLtd (TPE:1808) Paint An Interesting Picture

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Run Long ConstructionLtd (TPE:1808), it didn't seem to tick all of these boxes.

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 Run Long ConstructionLtd, this is the formula:

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

0.0035 = NT$55m ÷ (NT$35b - NT$20b) (Based on the trailing twelve months to September 2020).

Thus, Run Long ConstructionLtd has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Construction industry average of 7.5%.

View our latest analysis for Run Long ConstructionLtd

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

What Can We Tell From Run Long ConstructionLtd's ROCE Trend?

In terms of Run Long ConstructionLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 17%, but since then they've fallen to 0.4%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a separate but related note, it's important to know that Run Long ConstructionLtd has a current liabilities to total assets ratio of 56%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Run Long ConstructionLtd. And long term investors must be optimistic going forward because the stock has returned a huge 311% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Like most companies, Run Long ConstructionLtd does come with some risks, and we've found 3 warning signs that you should be aware of.

While Run Long ConstructionLtd 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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