We're Watching These Trends At Kwong Lung Enterprise (GTSM:8916)

If you're looking for a multi-bagger, there's a few things to keep an eye out 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. Although, when we looked at Kwong Lung Enterprise (GTSM:8916), it didn't seem to tick all of these boxes.

Understanding 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. To calculate this metric for Kwong Lung Enterprise, this is the formula:

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

0.091 = NT$496m ÷ (NT$7.6b - NT$2.1b) (Based on the trailing twelve months to September 2020).

So, Kwong Lung Enterprise has an ROCE of 9.1%. On its own, that's a low figure but it's around the 10% average generated by the Consumer Durables industry.

View our latest analysis for Kwong Lung Enterprise

Above you can see how the current ROCE for Kwong Lung Enterprise compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

In terms of Kwong Lung Enterprise's historical ROCE trend, it doesn't exactly demand attention. The company has employed 33% more capital in the last five years, and the returns on that capital have remained stable at 9.1%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, Kwong Lung Enterprise has done well to reduce current liabilities to 28% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

Our Take On Kwong Lung Enterprise's ROCE

Long story short, while Kwong Lung Enterprise has been reinvesting its capital, the returns that it's generating haven't increased. Unsurprisingly, the stock has only gained 1.6% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you want to continue researching Kwong Lung Enterprise, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Kwong Lung Enterprise isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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.
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