Hong Yi Fiber Ind's (TPE:1452) Returns On Capital Tell Us There Is Reason To Feel Uneasy

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. Having said that, after a brief look, Hong Yi Fiber Ind (TPE:1452) we aren't filled with optimism, but let's investigate further.

What is Return On Capital Employed (ROCE)?

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 Yi Fiber Ind:

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

0.016 = NT$41m ÷ (NT$2.7b - NT$178m) (Based on the trailing twelve months to December 2020).

So, Hong Yi Fiber Ind has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 2.8%.

See our latest analysis for Hong Yi Fiber Ind

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

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Hong Yi Fiber Ind, given the returns are trending downwards. To be more specific, the ROCE was 8.8% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Hong Yi Fiber Ind to turn into a multi-bagger.

What We Can Learn From Hong Yi Fiber Ind's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. However the stock has delivered a 52% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Hong Yi Fiber Ind does have some risks, we noticed 3 warning signs (and 1 which is a bit concerning) we think you should know about.

While Hong Yi Fiber Ind 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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