Here’s What’s Happening With Returns At Chien Kuo Construction (TPE:5515)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Speaking of which, we noticed some great changes in Chien Kuo Construction's (TPE:5515) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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 Chien Kuo Construction, this is the formula:

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

0.061 = NT$334m ÷ (NT$8.9b - NT$3.4b) (Based on the trailing twelve months to September 2020).

Thus, Chien Kuo Construction has an ROCE of 6.1%. On its own, that's a low figure but it's around the 7.5% average generated by the Construction industry.

See 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 want to delve into the historical earnings, revenue and cash flow of Chien Kuo Construction, check out these free graphs here.

So How Is Chien Kuo Construction's ROCE Trending?

We're pretty happy with how the ROCE has been trending at Chien Kuo Construction. The figures show that over the last five years, returns on capital have grown by 496%. The company is now earning NT$0.06 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 27% less than it was five years ago, which can be indicative of a business that's improving its efficiency. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 38% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

In Conclusion...

In summary, it's great to see that Chien Kuo Construction has been able to turn things around and earn higher returns on lower amounts of capital. Since the stock has returned a staggering 102% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Chien Kuo Construction can keep these trends up, it could have a bright future ahead.

Like most companies, Chien Kuo Construction does come with some risks, and we've found 1 warning sign that you should be aware of.

While Chien Kuo Construction 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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