Is Lian Hwa Foods (TPE:1231) A Future Multi-bagger?

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Speaking of which, we noticed some great changes in Lian Hwa Foods' (TPE:1231) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Lian Hwa Foods, this is the formula:

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

0.12 = NT$733m ÷ (NT$8.7b - NT$2.6b) (Based on the trailing twelve months to September 2020).

So, Lian Hwa Foods has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 8.5% generated by the Food industry.

Check out our latest analysis for Lian Hwa Foods

Historical performance is a great place to start when researching a stock so above you can see the gauge for Lian Hwa Foods' ROCE against it's prior returns. If you'd like to look at how Lian Hwa Foods has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Lian Hwa Foods' ROCE Trending?

We like the trends that we're seeing from Lian Hwa Foods. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 12%. Basically the business is earning more per dollar of capital invested and in addition to that, 38% more capital is being employed now too. So we're very much inspired by what we're seeing at Lian Hwa Foods thanks to its ability to profitably reinvest capital.

The Bottom Line On Lian Hwa Foods' ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Lian Hwa Foods has. Since the stock has returned a staggering 143% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Lian Hwa Foods can keep these trends up, it could have a bright future ahead.

On a final note, we've found 2 warning signs for Lian Hwa Foods that we think you should be aware of.

While Lian Hwa Foods isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

If you decide to trade Lian Hwa Foods, 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@simplywallst.com.