Returns On Capital At Far Eastern New Century (TWSE:1402) Have Hit The Brakes

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Far Eastern New Century (TWSE:1402), it didn't seem to tick all of these boxes.

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 Far Eastern New Century:

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

0.031 = NT$16b ÷ (NT$679b - NT$149b) (Based on the trailing twelve months to June 2024).

Thus, Far Eastern New Century has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Industrials industry average of 6.5%.

Check out our latest analysis for Far Eastern New Century

Above you can see how the current ROCE for Far Eastern New Century 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 analyst report for Far Eastern New Century .

What The Trend Of ROCE Can Tell Us

Things have been pretty stable at Far Eastern New Century, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Far Eastern New Century to be a multi-bagger going forward. That probably explains why Far Eastern New Century has been paying out 76% of its earnings as dividends to shareholders. Most shareholders probably know this and own the stock for its dividend.

Our Take On Far Eastern New Century's ROCE

In a nutshell, Far Eastern New Century has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has gained an impressive 56% 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 to note, we've identified 1 warning sign with Far Eastern New Century and understanding this should be part of your investment process.

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.