Why We Like The Returns At Chung Hwa Food Industrial (GTSM:4205)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of Chung Hwa Food Industrial (GTSM:4205) we really 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. 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%. That's a fantastic return and not only that, it outpaces the average of 8.5% earned by companies in a similar industry.

Check out 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 want to delve into the historical earnings, revenue and cash flow of Chung Hwa Food Industrial, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from Chung Hwa Food Industrial. The data shows that returns on capital have increased substantially over the last five years 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. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line On Chung Hwa Food Industrial's ROCE

To sum it up, Chung Hwa Food Industrial has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. 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.

Chung Hwa Food Industrial does have some risks though, and we've spotted 1 warning sign for Chung Hwa Food Industrial that you might be interested in.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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