Does Chainqui Construction DevelopmentLtd (TPE:2509) Have The Makings Of A Multi-Bagger?

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. With that in mind, we've noticed some promising trends at Chainqui Construction DevelopmentLtd (TPE:2509) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

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 Chainqui Construction DevelopmentLtd, this is the formula:

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

0.036 = NT$210m ÷ (NT$8.0b - NT$2.1b) (Based on the trailing twelve months to September 2020).

Therefore, Chainqui Construction DevelopmentLtd has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Construction industry average of 7.5%.

View our latest analysis for Chainqui Construction DevelopmentLtd

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

What The Trend Of ROCE Can Tell Us

The fact that Chainqui Construction DevelopmentLtd is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 3.6% which is a sight for sore eyes. In addition to that, Chainqui Construction DevelopmentLtd is employing 74% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a related note, the company's ratio of current liabilities to total assets has decreased to 27%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

In Conclusion...

Overall, Chainqui Construction DevelopmentLtd gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Considering the stock has delivered 38% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

One more thing: We've identified 4 warning signs with Chainqui Construction DevelopmentLtd (at least 1 which is potentially serious) , and understanding them would certainly be useful.

While Chainqui Construction DevelopmentLtd 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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