We Like These Underlying Trends At Lily Textile (TPE:1443)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Lily Textile's (TPE:1443) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Lily Textile:

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

0.055 = NT$79m ÷ (NT$5.5b - NT$4.1b) (Based on the trailing twelve months to September 2020).

So, Lily Textile has an ROCE of 5.5%. In absolute terms, that's a low return, but it's much better than the Luxury industry average of 4.0%.

View our latest analysis for Lily Textile

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 Lily Textile, check out these free graphs here.

So How Is Lily Textile's ROCE Trending?

Like most people, we're pleased that Lily Textile is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 27%. This could potentially mean that the company is selling some of its assets.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 74% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

In Conclusion...

In a nutshell, we're pleased to see that Lily Textile has been able to generate higher returns from less capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Lily Textile (of which 1 is potentially serious!) that you should know about.

While Lily Textile 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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