What Do The Returns At Hong Ho Precision TextileLtd (TPE:1446) Mean Going Forward?

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Speaking of which, we noticed some great changes in Hong Ho Precision TextileLtd's (TPE:1446) returns on capital, so let's have a look.

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. The formula for this calculation on Hong Ho Precision TextileLtd is:

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%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 4.0%.

Check out 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.

What Does the ROCE Trend For Hong Ho Precision TextileLtd Tell Us?

Shareholders will be relieved that Hong Ho Precision TextileLtd has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 0.4%, which is always encouraging. While returns have increased, the amount of capital employed by Hong Ho Precision TextileLtd has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

The Key Takeaway

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. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 41% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing, we've spotted 1 warning sign facing Hong Ho Precision TextileLtd that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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