Should We Be Excited About The Trends Of Returns At Lumax International (TPE:6192)?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Lumax International (TPE:6192), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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 Lumax International:

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

0.16 = NT$832m ÷ (NT$7.6b - NT$2.2b) (Based on the trailing twelve months to September 2020).

So, Lumax International has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 12% generated by the Trade Distributors industry.

Check out our latest analysis for Lumax International

Historical performance is a great place to start when researching a stock so above you can see the gauge for Lumax International's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Lumax International, check out these free graphs here.

How Are Returns Trending?

There hasn't been much to report for Lumax International's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at Lumax International in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

Our Take On Lumax International's ROCE

We can conclude that in regards to Lumax International's returns on capital employed and the trends, there isn't much change to report on. Since the stock has gained an impressive 84% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing, we've spotted 1 warning sign facing Lumax International that you might find interesting.

While Lumax International 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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