Returns On Capital At Khgears International (TPE:4571) Paint An Interesting Picture

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. In light of that, when we looked at Khgears International (TPE:4571) and its ROCE trend, we weren't exactly thrilled.

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

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. To calculate this metric for Khgears International, this is the formula:

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

0.15 = NT$260m ÷ (NT$2.3b - NT$610m) (Based on the trailing twelve months to September 2020).

Therefore, Khgears International has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 9.3% generated by the Machinery industry.

See our latest analysis for Khgears International

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

What Can We Tell From Khgears International's ROCE Trend?

On the surface, the trend of ROCE at Khgears International doesn't inspire confidence. To be more specific, ROCE has fallen from 19% over the last three years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Khgears International's ROCE

In summary, Khgears International is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 16% over the last year, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Like most companies, Khgears International does come with some risks, and we've found 1 warning sign 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.

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