Returns On Capital Are Showing Encouraging Signs At Da-Cin ConstructionLtd (TPE:2535)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Speaking of which, we noticed some great changes in Da-Cin ConstructionLtd's (TPE:2535) returns on capital, so let's have a look.

What is 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 Da-Cin ConstructionLtd:

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

0.13 = NT$1.3b ÷ (NT$20b - NT$9.8b) (Based on the trailing twelve months to December 2020).

So, Da-Cin ConstructionLtd has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 8.0% it's much better.

See our latest analysis for Da-Cin ConstructionLtd

In the above chart we have measured Da-Cin ConstructionLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Da-Cin ConstructionLtd here for free.

So How Is Da-Cin ConstructionLtd's ROCE Trending?

Da-Cin ConstructionLtd has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 103% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

On a side note, Da-Cin ConstructionLtd's current liabilities are still rather high at 49% of total assets. 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.

What We Can Learn From Da-Cin ConstructionLtd's ROCE

In summary, we're delighted to see that Da-Cin ConstructionLtd has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you'd like to know about the risks facing Da-Cin ConstructionLtd, we've discovered 3 warning signs that you should be aware of.

While Da-Cin ConstructionLtd 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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