If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Regal Holding (TPE:4807) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding Return On Capital Employed (ROCE)
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. To calculate this metric for Regal Holding, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.096 = NT$106m ÷ (NT$1.6b - NT$480m) (Based on the trailing twelve months to September 2020).
Therefore, Regal Holding has an ROCE of 9.6%. In absolute terms, that's a low return, but it's much better than the Luxury industry average of 4.0%.
Check out our latest analysis for Regal Holding
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'd like to look at how Regal Holding has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Regal Holding doesn't inspire confidence. To be more specific, ROCE has fallen from 34% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a related note, Regal Holding has decreased its current liabilities to 30% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
What We Can Learn From Regal Holding's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Regal Holding. And there could be an opportunity here if other metrics look good too, because the stock has declined 61% in the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
Regal Holding does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is potentially serious...
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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About TWSE:4807
Regal Holding
Designs, manufactures, and sells jewelry in Thailand, the United States, France, the United Kingdom, Canada, Australia, and internationally.
Slight and slightly overvalued.
