Stock Analysis

Returns On Capital At Hsin Yung Chien (TPE:2114) Paint An Interesting Picture

TWSE:2114
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There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Looking at Hsin Yung Chien (TPE:2114), it does have a high ROCE right now, but lets see how returns are trending.

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 Hsin Yung Chien, this is the formula:

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

0.22 = NT$498m ÷ (NT$2.6b - NT$308m) (Based on the trailing twelve months to September 2020).

So, Hsin Yung Chien has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Machinery industry average of 9.4%.

View our latest analysis for Hsin Yung Chien

roce
TSEC:2114 Return on Capital Employed March 11th 2021

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 Hsin Yung Chien, check out these free graphs here.

The Trend Of ROCE

Things have been pretty stable at Hsin Yung Chien, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So while the current operations are delivering respectable returns, unless capital employed increases we'd be hard-pressed to believe it's a multi-bagger going forward.

What We Can Learn From Hsin Yung Chien's ROCE

Although is allocating it's capital efficiently to generate impressive returns, it isn't compounding its base of capital, which is what we'd see from a multi-bagger. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 112% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Like most companies, Hsin Yung Chien does come with some risks, and we've found 2 warning signs that you should be aware of.

Hsin Yung Chien is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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