The Return Trends At Hong Ho Precision TextileLtd (TPE:1446) Look Promising

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. With that in mind, we've noticed some promising trends at Hong Ho Precision TextileLtd (TPE:1446) so let's look a bit deeper.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Hong Ho Precision TextileLtd:

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

0.004 = NT$14m ÷ (NT$4.1b - NT$458m) (Based on the trailing twelve months to September 2020).

Therefore, Hong Ho Precision TextileLtd has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Luxury industry average of 3.1%.

See our latest analysis for Hong Ho Precision TextileLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hong Ho Precision TextileLtd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Hong Ho Precision TextileLtd, check out these free graphs here.

The Trend Of ROCE

Shareholders will be relieved that Hong Ho Precision TextileLtd has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 0.4% on its capital. While returns have increased, the amount of capital employed by Hong Ho Precision TextileLtd has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Bottom Line

In summary, we're delighted to see that Hong Ho Precision TextileLtd has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a solid 55% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Hong Ho Precision TextileLtd does have some risks though, and we've spotted 1 warning sign for Hong Ho Precision TextileLtd that you might be interested in.

While Hong Ho Precision TextileLtd 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. 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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