Returns On Capital At Chun Yu Works (TPE:2012) Have Stalled

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Having said that, from a first glance at Chun Yu Works (TPE:2012) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Chun Yu Works, this is the formula:

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

0.05 = NT$354m ÷ (NT$11b - NT$3.7b) (Based on the trailing twelve months to December 2020).

Therefore, Chun Yu Works has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 9.2%.

See our latest analysis for Chun Yu Works

Historical performance is a great place to start when researching a stock so above you can see the gauge for Chun Yu Works' ROCE against it's prior returns. If you'd like to look at how Chun Yu Works has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Chun Yu Works' ROCE Trend?

The returns on capital haven't changed much for Chun Yu Works in recent years. Over the past five years, ROCE has remained relatively flat at around 5.0% and the business has deployed 32% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, Chun Yu Works has done well to reduce current liabilities to 35% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

In Conclusion...

In conclusion, Chun Yu Works has been investing more capital into the business, but returns on that capital haven't increased. Yet to long term shareholders the stock has gifted them an incredible 141% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Chun Yu Works does have some risks, we noticed 4 warning signs (and 1 which is significant) we think you should know about.

While Chun Yu Works 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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