General Plastic Industrial (TPE:6128) May Have Issues Allocating Its Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at General Plastic Industrial (TPE:6128) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is 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. The formula for this calculation on General Plastic Industrial is:

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

0.023 = NT$91m ÷ (NT$6.5b - NT$2.6b) (Based on the trailing twelve months to December 2020).

Thus, General Plastic Industrial has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 5.4%.

See our latest analysis for General Plastic Industrial

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 want to delve into the historical earnings, revenue and cash flow of General Plastic Industrial, check out these free graphs here.

The Trend Of ROCE

On the surface, the trend of ROCE at General Plastic Industrial doesn't inspire confidence. To be more specific, ROCE has fallen from 15% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line On General Plastic Industrial's ROCE

We're a bit apprehensive about General Plastic Industrial because despite more capital being deployed in the business, returns on that capital and sales have both fallen. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with General Plastic Industrial (including 1 which is a bit unpleasant) .

While General Plastic Industrial 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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