The Returns On Capital At Hong Yi Fiber Ind (TPE:1452) Don't Inspire Confidence

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within Hong Yi Fiber Ind (TPE:1452), we weren't too hopeful.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Hong Yi Fiber Ind, this is the formula:

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

0.019 = NT$48m ÷ (NT$2.6b - NT$101m) (Based on the trailing twelve months to September 2020).

Thus, Hong Yi Fiber Ind has an ROCE of 1.9%. 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 Yi Fiber Ind

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'd like to look at how Hong Yi Fiber Ind has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

There is reason to be cautious about Hong Yi Fiber Ind, given the returns are trending downwards. About five years ago, returns on capital were 9.4%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Hong Yi Fiber Ind to turn into a multi-bagger.

The Bottom Line On Hong Yi Fiber Ind's ROCE

In summary, it's unfortunate that Hong Yi Fiber Ind is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 3.2% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Hong Yi Fiber Ind (including 1 which is concerning) .

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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