Chung-Hsin Electric and Machinery Manufacturing (TWSE:1513) Is Looking To Continue Growing Its Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. So on that note, Chung-Hsin Electric and Machinery Manufacturing (TWSE:1513) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Chung-Hsin Electric and Machinery Manufacturing:

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

0.14 = NT$4.3b ÷ (NT$49b - NT$17b) (Based on the trailing twelve months to September 2024).

So, Chung-Hsin Electric and Machinery Manufacturing has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 8.2% generated by the Electrical industry.

See our latest analysis for Chung-Hsin Electric and Machinery Manufacturing

Above you can see how the current ROCE for Chung-Hsin Electric and Machinery Manufacturing compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Chung-Hsin Electric and Machinery Manufacturing for free.

The Trend Of ROCE

Investors would be pleased with what's happening at Chung-Hsin Electric and Machinery Manufacturing. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 14%. The amount of capital employed has increased too, by 224%. 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.

One more thing to note, Chung-Hsin Electric and Machinery Manufacturing has decreased current liabilities to 35% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Chung-Hsin Electric and Machinery Manufacturing has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

In Conclusion...

All in all, it's terrific to see that Chung-Hsin Electric and Machinery Manufacturing is reaping the rewards from prior investments and is growing its capital base. 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 a final note, we've found 1 warning sign for Chung-Hsin Electric and Machinery Manufacturing that we think you should be aware of.

While Chung-Hsin Electric and Machinery Manufacturing 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. 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.