Is There More Growth In Store For Taiwan Fu Hsing IndustrialLtd's (TPE:9924) Returns On Capital?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. With that in mind, we've noticed some promising trends at Taiwan Fu Hsing IndustrialLtd (TPE:9924) so let's look a bit deeper.

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. To calculate this metric for Taiwan Fu Hsing IndustrialLtd, this is the formula:

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

0.18 = NT$1.2b ÷ (NT$8.5b - NT$2.0b) (Based on the trailing twelve months to September 2020).

Thus, Taiwan Fu Hsing IndustrialLtd has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 4.2% generated by the Building industry.

Check out our latest analysis for Taiwan Fu Hsing IndustrialLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Taiwan Fu Hsing IndustrialLtd's ROCE against it's prior returns. If you'd like to look at how Taiwan Fu Hsing IndustrialLtd 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?

Investors would be pleased with what's happening at Taiwan Fu Hsing IndustrialLtd. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 18%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 21%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

What We Can Learn From Taiwan Fu Hsing IndustrialLtd's ROCE

To sum it up, Taiwan Fu Hsing IndustrialLtd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has only returned 38% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

One more thing to note, we've identified 1 warning sign with Taiwan Fu Hsing IndustrialLtd and understanding this should be part of your investment process.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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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