Should You Invest In Sunonwealth Electric Machine Industry (TPE:2421)?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. And in light of that, the trends we're seeing at Sunonwealth Electric Machine Industry's (TPE:2421) look very promising so lets take a look.

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. The formula for this calculation on Sunonwealth Electric Machine Industry is:

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

0.22 = NT$1.2b ÷ (NT$10b - NT$4.8b) (Based on the trailing twelve months to September 2020).

Therefore, Sunonwealth Electric Machine Industry has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 9.3% earned by companies in a similar industry.

See our latest analysis for Sunonwealth Electric Machine Industry

In the above chart we have measured Sunonwealth Electric Machine Industry's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Sunonwealth Electric Machine Industry.

What Can We Tell From Sunonwealth Electric Machine Industry's ROCE Trend?

The trends we've noticed at Sunonwealth Electric Machine Industry are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 22%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 29%. So we're very much inspired by what we're seeing at Sunonwealth Electric Machine Industry thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Sunonwealth Electric Machine Industry has a current liabilities to total assets ratio of 48%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Sunonwealth Electric Machine Industry's ROCE

In summary, it's great to see that Sunonwealth Electric Machine Industry can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Sunonwealth Electric Machine Industry can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 1 warning sign with Sunonwealth Electric Machine Industry and understanding this should be part of your investment process.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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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