Returns On Capital - An Important Metric For I-HWA IndustrialLtd (TPE:1456)

What trends should we look for it we want to identify stocks that can 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, I-HWA IndustrialLtd (TPE:1456) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for I-HWA IndustrialLtd, this is the formula:

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

0.018 = NT$64m ÷ (NT$6.7b - NT$3.1b) (Based on the trailing twelve months to September 2020).

So, I-HWA IndustrialLtd has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 4.0%.

View our latest analysis for I-HWA IndustrialLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for I-HWA IndustrialLtd's ROCE against it's prior returns. If you'd like to look at how I-HWA IndustrialLtd 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

We're delighted to see that I-HWA IndustrialLtd is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 1.8% on its capital. And unsurprisingly, like most companies trying to break into the black, I-HWA IndustrialLtd is utilizing 182% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 47%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

In Conclusion...

To the delight of most shareholders, I-HWA IndustrialLtd has now broken into profitability. And with a respectable 80% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to know some of the risks facing I-HWA IndustrialLtd we've found 3 warning signs (1 can't be ignored!) that you should be aware of before investing here.

While I-HWA IndustrialLtd 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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