Tong Ming Enterprise's (TWSE:5538) Returns On Capital Not Reflecting Well On The Business

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 Tong Ming Enterprise (TWSE:5538), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Tong Ming Enterprise is:

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

0.047 = NT$435m ÷ (NT$14b - NT$4.5b) (Based on the trailing twelve months to September 2024).

So, Tong Ming Enterprise has an ROCE of 4.7%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 8.4%.

See our latest analysis for Tong Ming Enterprise

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Tong Ming Enterprise's past further, check out this free graph covering Tong Ming Enterprise's past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at Tong Ming Enterprise doesn't inspire confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 4.7%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

What We Can Learn From Tong Ming Enterprise's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Tong Ming Enterprise have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 63% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you want to know some of the risks facing Tong Ming Enterprise we've found 2 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

While Tong Ming Enterprise 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.