Returns On Capital - An Important Metric For Taiyen Biotech (TPE:1737)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Taiyen Biotech's (TPE:1737) 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 Taiyen Biotech, this is the formula:

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

0.057 = NT$402m ÷ (NT$7.5b - NT$537m) (Based on the trailing twelve months to September 2020).

Therefore, Taiyen Biotech has an ROCE of 5.7%. In absolute terms, that's a low return and it also under-performs the Food industry average of 8.5%.

See our latest analysis for Taiyen Biotech

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

How Are Returns Trending?

Taiyen Biotech is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 26% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

In Conclusion...

In summary, we're delighted to see that Taiyen Biotech has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has only returned 20% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

If you want to continue researching Taiyen Biotech, you might be interested to know about the 1 warning sign that our analysis has discovered.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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