Feng Tay Enterprises (TWSE:9910) May Have Issues Allocating Its Capital

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. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Looking at Feng Tay Enterprises (TWSE:9910), it does have a high ROCE right now, but lets see how returns are trending.

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 Feng Tay Enterprises, this is the formula:

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

0.21 = NT$7.6b ÷ (NT$53b - NT$17b) (Based on the trailing twelve months to June 2024).

Thus, Feng Tay Enterprises has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 2.1% earned by companies in a similar industry.

View our latest analysis for Feng Tay Enterprises

Above you can see how the current ROCE for Feng Tay Enterprises compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Feng Tay Enterprises for free.

What Can We Tell From Feng Tay Enterprises' ROCE Trend?

In terms of Feng Tay Enterprises' historical ROCE movements, the trend isn't fantastic. While it's comforting that the ROCE is high, five years ago it was 36%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Feng Tay Enterprises' ROCE

Bringing it all together, while we're somewhat encouraged by Feng Tay Enterprises' reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 4.5% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One more thing to note, we've identified 1 warning sign with Feng Tay Enterprises and understanding this 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.