Returns On Capital At Prime Oil Chemical Service (TPE:2904) Have Stalled

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Prime Oil Chemical Service (TPE:2904) looks decent, right now, so lets see what the trend of returns can tell us.

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. To calculate this metric for Prime Oil Chemical Service, this is the formula:

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

0.14 = NT$182m ÷ (NT$1.6b - NT$364m) (Based on the trailing twelve months to December 2020).

Therefore, Prime Oil Chemical Service has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Oil and Gas industry average of 7.6% it's much better.

View our latest analysis for Prime Oil Chemical Service

Historical performance is a great place to start when researching a stock so above you can see the gauge for Prime Oil Chemical Service's ROCE against it's prior returns. If you're interested in investigating Prime Oil Chemical Service's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 14% for the last five years, and the capital employed within the business has risen 28% in that time. Since 14% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. 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.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 22% of total assets, this reported ROCE would probably be less than14% because total capital employed would be higher.The 14% ROCE could be even lower if current liabilities weren't 22% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.

The Bottom Line

To sum it up, Prime Oil Chemical Service has simply been reinvesting capital steadily, at those decent rates of return. Therefore it's no surprise that shareholders have earned a respectable 57% return if they held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

If you want to continue researching Prime Oil Chemical Service, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Prime Oil Chemical Service 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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