The Returns At De Licacy Industrial (TPE:1464) Provide Us With Signs Of What's To Come

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. In light of that, when we looked at De Licacy Industrial (TPE:1464) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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 De Licacy Industrial is:

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

0.031 = NT$272m ÷ (NT$18b - NT$8.7b) (Based on the trailing twelve months to September 2020).

So, De Licacy Industrial has an ROCE of 3.1%. 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 De Licacy Industrial

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

What Can We Tell From De Licacy Industrial's ROCE Trend?

In terms of De Licacy Industrial's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 6.0%, but since then they've fallen to 3.1%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a separate but related note, it's important to know that De Licacy Industrial has a current liabilities to total assets ratio of 50%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On De Licacy Industrial's ROCE

In summary, De Licacy Industrial is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 30% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing: We've identified 5 warning signs with De Licacy Industrial (at least 2 which are significant) , and understanding these would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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