Lih Tai Construction Enterprise (GTSM:5520) Is Looking To Continue Growing Its Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So when we looked at Lih Tai Construction Enterprise (GTSM:5520) and its trend of ROCE, 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. To calculate this metric for Lih Tai Construction Enterprise, this is the formula:

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

0.18 = NT$375m ÷ (NT$2.8b - NT$646m) (Based on the trailing twelve months to December 2020).

Thus, Lih Tai Construction Enterprise has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 8.5% generated by the Basic Materials industry.

View our latest analysis for Lih Tai Construction Enterprise

Historical performance is a great place to start when researching a stock so above you can see the gauge for Lih Tai Construction Enterprise's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Lih Tai Construction Enterprise, check out these free graphs here.

How Are Returns Trending?

Lih Tai Construction Enterprise has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 191% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

The Bottom Line

To sum it up, Lih Tai Construction Enterprise is collecting higher returns from the same amount of capital, and that's impressive. And a remarkable 114% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.

One more thing, we've spotted 1 warning sign facing Lih Tai Construction Enterprise that you might find interesting.

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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.
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