Will Drewloong Precision (TPE:4572) Multiply In Value Going Forward?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Drewloong Precision (TPE:4572), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Drewloong Precision:

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).

Thus, Drewloong Precision has an ROCE of 4.9%. In absolute terms, that's a low return, but it's much better than the Aerospace & Defense industry average of 4.0%.

Check out 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 want to delve into the historical earnings, revenue and cash flow of Drewloong Precision, check out these free graphs here.

What Can We Tell From Drewloong Precision's ROCE Trend?

On the surface, the trend of ROCE at Drewloong Precision doesn't inspire confidence. Around four years ago the returns on capital were 16%, but since then they've fallen to 4.9%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

In Conclusion...

In summary, we're somewhat concerned by Drewloong Precision's diminishing returns on increasing amounts of capital. However the stock has delivered a 20% return to shareholders over the last year, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

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 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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