What Do The Returns On Capital At Cathay Consolidated (TPE:1342) Tell Us?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. That's why when we briefly looked at Cathay Consolidated's (TPE:1342) ROCE trend, we were pretty happy with what we saw.

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 Cathay Consolidated, this is the formula:

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

0.20 = NT$246m ÷ (NT$1.7b - NT$465m) (Based on the trailing twelve months to September 2020).

So, Cathay Consolidated has an ROCE of 20%. In absolute terms, that's a satisfactory return, but compared to the Luxury industry average of 4.0% it's much better.

Check out our latest analysis for Cathay Consolidated

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

What Does the ROCE Trend For Cathay Consolidated Tell Us?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past three years, ROCE has remained relatively flat at around 20% and the business has deployed 70% more capital into its operations. 20% is a pretty standard return, and it provides some comfort knowing that Cathay Consolidated has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Key Takeaway

To sum it up, Cathay Consolidated has simply been reinvesting capital steadily, at those decent rates of return. And since the stock has risen strongly over the last year, it appears the market might expect this trend to continue. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

If you want to continue researching Cathay Consolidated, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Cathay Consolidated 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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