Is LongDa Construction & Development (TPE:5519) Likely To Turn Things Around?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think LongDa Construction & Development (TPE:5519) 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)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for LongDa Construction & Development, this is the formula:

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

0.057 = NT$402m ÷ (NT$8.8b - NT$1.8b) (Based on the trailing twelve months to September 2020).

So, LongDa Construction & Development has an ROCE of 5.7%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 7.5%.

Check out our latest analysis for LongDa Construction & Development

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of LongDa Construction & Development, check out these free graphs here.

The Trend Of ROCE

When we looked at the ROCE trend at LongDa Construction & Development, we didn't gain much confidence. Around five years ago the returns on capital were 7.5%, but since then they've fallen to 5.7%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From LongDa Construction & Development's ROCE

To conclude, we've found that LongDa Construction & Development is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 45% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to continue researching LongDa Construction & Development, you might be interested to know about the 4 warning signs that our analysis has discovered.

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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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