Stock Analysis

What Do The Returns On Capital At Hsin Yung Chien (TPE:2114) Tell Us?

TWSE:2114
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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. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, while the ROCE is currently high for Hsin Yung Chien (TPE:2114), we aren't jumping out of our chairs because returns are decreasing.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Hsin Yung Chien:

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 9.3%.

View our latest analysis for Hsin Yung Chien

roce
TSEC:2114 Return on Capital Employed December 10th 2020

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hsin Yung Chien's ROCE against it's prior returns. If you're interested in investigating Hsin Yung Chien's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Hsin Yung Chien's ROCE Trend?

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. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So it may not be a multi-bagger in the making, but given the decent 22% return on capital, it'd be difficult to find fault with the business's current operations.

The Key Takeaway

While Hsin Yung Chien has impressive profitability from its capital, it isn't increasing that amount of capital. Since the stock has gained an impressive 68% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a separate note, we've found 1 warning sign for Hsin Yung Chien you'll probably want to know about.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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