Under The Bonnet, Chung Hwa Food Industrial's (GTSM:4205) Returns Look Impressive

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Chung Hwa Food Industrial (GTSM:4205) looks great, so lets see what the trend can tell us.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Chung Hwa Food Industrial:

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

0.25 = NT$404m ÷ (NT$1.9b - NT$230m) (Based on the trailing twelve months to September 2020).

Thus, Chung Hwa Food Industrial has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Food industry average of 8.5%.

View our latest analysis for Chung Hwa Food Industrial

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

So How Is Chung Hwa Food Industrial's ROCE Trending?

Investors would be pleased with what's happening at Chung Hwa Food Industrial. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 25%. Basically the business is earning more per dollar of capital invested and in addition to that, 31% more capital is being employed now too. So we're very much inspired by what we're seeing at Chung Hwa Food Industrial thanks to its ability to profitably reinvest capital.

The Bottom Line On Chung Hwa Food Industrial's ROCE

In summary, it's great to see that Chung Hwa Food Industrial can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 220% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing, we've spotted 1 warning sign facing Chung Hwa Food Industrial that you might find interesting.

Chung Hwa Food Industrial is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

If you decide to trade Chung Hwa Food Industrial, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.