We Like These Underlying Trends At Tainan Enterprise (Cayman) (TPE:5906)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Tainan Enterprise (Cayman)'s (TPE:5906) returns on capital, so let's have a look.

What is 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. Analysts use this formula to calculate it for Tainan Enterprise (Cayman):

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

0.15 = NT$72m ÷ (NT$1.1b - NT$609m) (Based on the trailing twelve months to September 2020).

Thus, Tainan Enterprise (Cayman) has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 4.0% generated by the Luxury industry.

See our latest analysis for Tainan Enterprise (Cayman)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tainan Enterprise (Cayman)'s ROCE against it's prior returns. If you'd like to look at how Tainan Enterprise (Cayman) has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Tainan Enterprise (Cayman) Tell Us?

Shareholders will be relieved that Tainan Enterprise (Cayman) has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 15%, which is always encouraging. While returns have increased, the amount of capital employed by Tainan Enterprise (Cayman) has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 56% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

What We Can Learn From Tainan Enterprise (Cayman)'s ROCE

To bring it all together, Tainan Enterprise (Cayman) has done well to increase the returns it's generating from its capital employed. And a remarkable 270% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing, we've spotted 2 warning signs facing Tainan Enterprise (Cayman) that you might find interesting.

While Tainan Enterprise (Cayman) isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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