The Returns At Tainan Enterprise (Cayman) (TWSE:5906) Aren't Growing

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over Tainan Enterprise (Cayman)'s (TWSE:5906) trend of ROCE, we liked what we saw.

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. To calculate this metric for Tainan Enterprise (Cayman), this is the formula:

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

0.13 = NT$137m ÷ (NT$1.9b - NT$786m) (Based on the trailing twelve months to December 2023).

Therefore, Tainan Enterprise (Cayman) has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Luxury industry average of 2.8% it's much better.

Check out 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're interested in investigating Tainan Enterprise (Cayman)'s past further, check out this free graph covering Tainan Enterprise (Cayman)'s past earnings, revenue and cash flow.

The Trend Of ROCE

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 13% for the last five years, and the capital employed within the business has risen 140% in that time. 13% is a pretty standard return, and it provides some comfort knowing that Tainan Enterprise (Cayman) has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 42% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously. We'd like to see this trend continue though because as it stands today, thats still a pretty high level.

The Bottom Line

In the end, Tainan Enterprise (Cayman) has proven its ability to adequately reinvest capital at good rates of return. On top of that, the stock has rewarded shareholders with a remarkable 431% return to those who've held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

One more thing to note, we've identified 3 warning signs with Tainan Enterprise (Cayman) and understanding these should be part of your investment process.

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. 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.