Returns On Capital Are A Standout For Jia Wei Lifestyle (TWSE:3557)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. So when we looked at the ROCE trend of Jia Wei Lifestyle (TWSE:3557) we really liked what we saw.

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. Analysts use this formula to calculate it for Jia Wei Lifestyle:

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

0.20 = NT$512m ÷ (NT$5.0b - NT$2.4b) (Based on the trailing twelve months to December 2023).

Therefore, Jia Wei Lifestyle has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 8.1% earned by companies in a similar industry.

View our latest analysis for Jia Wei Lifestyle

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 Jia Wei Lifestyle has performed in the past in other metrics, you can view this free graph of Jia Wei Lifestyle's past earnings, revenue and cash flow.

How Are Returns Trending?

We're delighted to see that Jia Wei Lifestyle is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 20% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Jia Wei Lifestyle is utilizing 369% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 49% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

In Conclusion...

Overall, Jia Wei Lifestyle gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Jia Wei Lifestyle can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 2 warning signs with Jia Wei Lifestyle and understanding these should be part of your investment process.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.