Chien Kuo Construction (TPE:5515) Might Have The Makings Of A Multi-Bagger

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Chien Kuo Construction (TPE:5515) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Chien Kuo Construction is:

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

0.04 = NT$222m ÷ (NT$9.1b - NT$3.6b) (Based on the trailing twelve months to December 2020).

Therefore, Chien Kuo Construction has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Construction industry average of 8.0%.

Check out our latest analysis for Chien Kuo Construction

Historical performance is a great place to start when researching a stock so above you can see the gauge for Chien Kuo Construction's ROCE against it's prior returns. If you're interested in investigating Chien Kuo Construction's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Chien Kuo Construction is reaping rewards from its investments and has now broken into profitability. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 4.0% on their capital employed. In regards to capital employed, Chien Kuo Construction is using 24% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 40% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

What We Can Learn From Chien Kuo Construction's ROCE

In a nutshell, we're pleased to see that Chien Kuo Construction has been able to generate higher returns from less capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 98% return over the last five years. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a separate note, we've found 1 warning sign for Chien Kuo Construction you'll probably want to know about.

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