We're Watching These Trends At Ruentex Engineering & Construction (TPE:2597)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Ruentex Engineering & Construction (TPE:2597) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Ruentex Engineering & Construction is:

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

0.11 = NT$816m ÷ (NT$12b - NT$4.4b) (Based on the trailing twelve months to September 2020).

Therefore, Ruentex Engineering & Construction has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 7.5% it's much better.

View our latest analysis for Ruentex Engineering & Construction

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ruentex Engineering & Construction's ROCE against it's prior returns. If you'd like to look at how Ruentex Engineering & Construction has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Ruentex Engineering & Construction's ROCE Trending?

Over the past five years, Ruentex Engineering & Construction's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Ruentex Engineering & Construction to be a multi-bagger going forward.

In Conclusion...

In summary, Ruentex Engineering & Construction isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 159% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Like most companies, Ruentex Engineering & Construction does come with some risks, and we've found 2 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

If you decide to trade Ruentex Engineering & Construction, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.