CHANG TYPE Industrial (TPE:1541): Are Investors Overlooking Returns On Capital?

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. With that in mind, the ROCE of CHANG TYPE Industrial (TPE:1541) looks great, so lets see what the trend can tell us.

Understanding 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. The formula for this calculation on CHANG TYPE Industrial is:

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

0.31 = NT$579m ÷ (NT$3.7b - NT$1.8b) (Based on the trailing twelve months to September 2020).

Therefore, CHANG TYPE Industrial has an ROCE of 31%. In absolute terms that's a great return and it's even better than the Consumer Durables industry average of 11%.

View our latest analysis for CHANG TYPE Industrial

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're interested in investigating CHANG TYPE Industrial's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From CHANG TYPE Industrial's ROCE Trend?

We like the trends that we're seeing from CHANG TYPE Industrial. The data shows that returns on capital have increased substantially over the last five years to 31%. Basically the business is earning more per dollar of capital invested and in addition to that, 54% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, CHANG TYPE Industrial's current liabilities are still rather high at 49% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On CHANG TYPE Industrial's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what CHANG TYPE Industrial has. Considering the stock has delivered 20% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

If you want to continue researching CHANG TYPE Industrial, you might be interested to know about the 1 warning sign that our analysis has discovered.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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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