Can Ace Pillar (TPE:8374) Continue To Grow Its Returns On Capital?

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 Ace Pillar's (TPE:8374) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Ace Pillar, this is the formula:

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

0.02 = NT$40m ÷ (NT$2.7b - NT$698m) (Based on the trailing twelve months to September 2020).

So, Ace Pillar has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 12%.

View our latest analysis for Ace Pillar

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ace Pillar's ROCE against it's prior returns. If you'd like to look at how Ace Pillar has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

Ace Pillar has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 2.0% on its capital. And unsurprisingly, like most companies trying to break into the black, Ace Pillar is utilizing 21% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a related note, the company's ratio of current liabilities to total assets has decreased to 26%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Ace Pillar has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

Our Take On Ace Pillar's ROCE

Long story short, we're delighted to see that Ace Pillar's reinvestment activities have paid off and the company is now profitable. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. 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 the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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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