Lian Hwa Foods (TPE:1231) Is Looking To Continue Growing Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. 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 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. 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$739m ÷ (NT$8.8b - NT$2.4b) (Based on the trailing twelve months to December 2020).

Therefore, Lian Hwa Foods has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 8.5% it's much better.

See 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're interested in investigating Lian Hwa Foods' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Lian Hwa Foods Tell Us?

Lian Hwa Foods is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 12%. The amount of capital employed has increased too, by 36%. 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

In summary, it's great to see that Lian Hwa Foods 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 175% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a final note, we found 2 warning signs for Lian Hwa Foods (1 shouldn't be ignored) 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.

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