Investors Will Want Chung-Hsin Electric and Machinery Manufacturing's (TWSE:1513) Growth In ROCE To Persist

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Chung-Hsin Electric and Machinery Manufacturing (TWSE:1513) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Chung-Hsin Electric and Machinery Manufacturing is:

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

0.15 = NT$4.4b ÷ (NT$44b - NT$15b) (Based on the trailing twelve months to December 2023).

So, Chung-Hsin Electric and Machinery Manufacturing has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 6.8% generated by the Electrical industry.

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

In the above chart we have measured Chung-Hsin Electric and Machinery Manufacturing's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Chung-Hsin Electric and Machinery Manufacturing .

The Trend Of ROCE

Chung-Hsin Electric and Machinery Manufacturing is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 15%. The amount of capital employed has increased too, by 232%. So we're very much inspired by what we're seeing at Chung-Hsin Electric and Machinery Manufacturing thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 35%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. 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.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Chung-Hsin Electric and Machinery Manufacturing has. Since the stock has returned a staggering 962% to shareholders over the last five years, it looks like investors are recognizing these changes. 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 separate note, we've found 5 warning signs for Chung-Hsin Electric and Machinery Manufacturing you'll probably want to know about.

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.