Our Take On The Returns On Capital At Chlitina Holding (TPE:4137)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. In light of that, when we looked at Chlitina Holding (TPE:4137) and its ROCE trend, we weren't exactly thrilled.

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 Chlitina Holding, this is the formula:

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

0.18 = NT$1.1b ÷ (NT$9.0b - NT$2.8b) (Based on the trailing twelve months to December 2020).

So, Chlitina Holding has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 12% generated by the Personal Products industry.

View our latest analysis for Chlitina Holding

In the above chart we have measured Chlitina Holding's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Chlitina Holding.

The Trend Of ROCE

The trend of ROCE doesn't look fantastic because it's fallen from 29% five years ago, while the business's capital employed increased by 28%. That being said, Chlitina Holding raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Chlitina Holding probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 31%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

Our Take On Chlitina Holding's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Chlitina Holding have fallen, meanwhile the business is employing more capital than it was five years ago. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

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

While Chlitina Holding 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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