Returns On Capital At Kaori Heat Treatment (TPE:8996) Paint An Interesting Picture

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Kaori Heat Treatment (TPE:8996) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

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 Kaori Heat Treatment:

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

0.056 = NT$132m ÷ (NT$3.6b - NT$1.2b) (Based on the trailing twelve months to September 2020).

Thus, Kaori Heat Treatment has an ROCE of 5.6%. Ultimately, that's a low return and it under-performs the Machinery industry average of 9.3%.

View our latest analysis for Kaori Heat Treatment

Above you can see how the current ROCE for Kaori Heat Treatment compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Kaori Heat Treatment's ROCE Trend?

Things have been pretty stable at Kaori Heat Treatment, with its capital employed and returns on that capital staying somewhat the same for the last 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 Kaori Heat Treatment in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

The Key Takeaway

In a nutshell, Kaori Heat Treatment has been trudging along with the same returns from the same amount of capital over the last five years. Although the market must be expecting these trends to improve because the stock has gained 57% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing: We've identified 5 warning signs with Kaori Heat Treatment (at least 3 which are potentially serious) , and understanding them would certainly be useful.

While Kaori Heat Treatment 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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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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