Returns On Capital Signal Tricky Times Ahead For Strong H Machinery Technology (Cayman) Incorporation (TPE:4560)

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Strong H Machinery Technology (Cayman) Incorporation (TPE:4560), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Strong H Machinery Technology (Cayman) Incorporation is:

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

0.077 = NT$120m ÷ (NT$2.4b - NT$818m) (Based on the trailing twelve months to September 2020).

Thus, Strong H Machinery Technology (Cayman) Incorporation has an ROCE of 7.7%. On its own, that's a low figure but it's around the 9.4% average generated by the Machinery industry.

Check out our latest analysis for Strong H Machinery Technology (Cayman) Incorporation

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

How Are Returns Trending?

In terms of Strong H Machinery Technology (Cayman) Incorporation's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 28% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line On Strong H Machinery Technology (Cayman) Incorporation's ROCE

In summary, we're somewhat concerned by Strong H Machinery Technology (Cayman) Incorporation's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last three years have experienced a 25% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing to note, we've identified 1 warning sign with Strong H Machinery Technology (Cayman) Incorporation and understanding this should be part of your investment process.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

When trading Strong H Machinery Technology (Cayman) Incorporation or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide 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.