Hwang Chang General Contractor (TWSE:2543) Is Very Good At Capital Allocation

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. And in light of that, the trends we're seeing at Hwang Chang General Contractor's (TWSE:2543) look very promising so lets take a look.

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 Hwang Chang General Contractor, this is the formula:

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

0.20 = NT$831m ÷ (NT$15b - NT$10b) (Based on the trailing twelve months to March 2024).

Therefore, Hwang Chang General Contractor has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Construction industry average of 12%.

View our latest analysis for Hwang Chang General Contractor

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hwang Chang General Contractor's ROCE against it's prior returns. If you'd like to look at how Hwang Chang General Contractor has performed in the past in other metrics, you can view this free graph of Hwang Chang General Contractor's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Hwang Chang General Contractor has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 20% on its capital. And unsurprisingly, like most companies trying to break into the black, Hwang Chang General Contractor is utilizing 76% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a side note, Hwang Chang General Contractor's current liabilities are still rather high at 71% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

Overall, Hwang Chang General Contractor gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Hwang Chang General Contractor can keep these trends up, it could have a bright future ahead.

One final note, you should learn about the 2 warning signs we've spotted with Hwang Chang General Contractor (including 1 which can't be ignored) .

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.