Returns On Capital At Quang Viet Enterprise (TPE:4438) Paint An Interesting Picture

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Quang Viet Enterprise (TPE:4438) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on Quang Viet Enterprise is:

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

0.053 = NT$494m ÷ (NT$14b - NT$4.4b) (Based on the trailing twelve months to September 2020).

Thus, Quang Viet Enterprise has an ROCE of 5.3%. In absolute terms, that's a low return, but it's much better than the Luxury industry average of 4.0%.

See our latest analysis for Quang Viet Enterprise

In the above chart we have measured Quang Viet Enterprise's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Quang Viet Enterprise here for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Quang Viet Enterprise doesn't inspire confidence. Around five years ago the returns on capital were 31%, but since then they've fallen to 5.3%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Quang Viet Enterprise has done well to pay down its current liabilities to 32% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Quang Viet Enterprise's ROCE

In summary, we're somewhat concerned by Quang Viet Enterprise's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last five years have experienced a 40% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Quang Viet Enterprise does have some risks though, and we've spotted 3 warning signs for Quang Viet Enterprise that you might be interested in.

While Quang Viet Enterprise 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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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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