Here’s What’s Happening With Returns At Tex-Ray Industrial (TPE:1467)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Tex-Ray Industrial (TPE:1467) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Tex-Ray Industrial, this is the formula:

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

0.039 = NT$203m ÷ (NT$8.7b - NT$3.5b) (Based on the trailing twelve months to September 2020).

So, Tex-Ray Industrial has an ROCE of 3.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.0%.

View our latest analysis for Tex-Ray Industrial

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tex-Ray Industrial's ROCE against it's prior returns. If you're interested in investigating Tex-Ray Industrial's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

While there are companies with higher returns on capital out there, we still find the trend at Tex-Ray Industrial promising. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 81% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

On a separate but related note, it's important to know that Tex-Ray Industrial has a current liabilities to total assets ratio of 40%, 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

To sum it up, Tex-Ray Industrial is collecting higher returns from the same amount of capital, and that's impressive. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 39% to shareholders. So with that in mind, we think the stock deserves further research.

On a final note, we've found 1 warning sign for Tex-Ray Industrial that we think you should be aware of.

While Tex-Ray Industrial isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

If you’re looking to trade Tex-Ray Industrial, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.