The Trends At Drewloong Precision (TPE:4572) That You Should Know About

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. 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 Drewloong Precision (TPE:4572) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Drewloong Precision is:

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

0.049 = NT$100m ÷ (NT$2.1b - NT$86m) (Based on the trailing twelve months to September 2020).

Therefore, Drewloong Precision has an ROCE of 4.9%. In absolute terms, that's a low return and it also under-performs the Aerospace & Defense industry average of 7.3%.

See our latest analysis for Drewloong Precision

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

So How Is Drewloong Precision's ROCE Trending?

In terms of Drewloong Precision's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 16% over the last four 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.

What We Can Learn From Drewloong Precision's ROCE

In summary, we're somewhat concerned by Drewloong Precision's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 30% over the last year, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to continue researching Drewloong Precision, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Drewloong Precision isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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