Will Chateau International Development (TPE:2722) Multiply In Value Going Forward?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Chateau International Development (TPE:2722) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is 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. Analysts use this formula to calculate it for Chateau International Development:

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

0.039 = NT$85m ÷ (NT$2.6b - NT$414m) (Based on the trailing twelve months to December 2020).

Thus, Chateau International Development has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 5.6%.

Check out our latest analysis for Chateau International Development

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 want to delve into the historical earnings, revenue and cash flow of Chateau International Development, check out these free graphs here.

What Does the ROCE Trend For Chateau International Development Tell Us?

In terms of Chateau International Development's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 3.9% from 12% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Chateau International Development's ROCE

To conclude, we've found that Chateau International Development is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 17% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you want to continue researching Chateau International Development, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Chateau International Development may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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