We Like These Underlying Trends At Lih Tai Construction Enterprise (GTSM:5520)

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. 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.

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. Analysts use this formula to calculate it for Lih Tai Construction Enterprise:

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

0.15 = NT$306m ÷ (NT$2.6b - NT$543m) (Based on the trailing twelve months to September 2020).

Thus, Lih Tai Construction Enterprise has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Basic Materials industry average of 8.2% it's much better.

Check out our latest analysis for Lih Tai Construction Enterprise

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Lih Tai Construction Enterprise's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Lih Tai Construction Enterprise's ROCE Trend?

Lih Tai Construction Enterprise 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 130% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. 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 Key Takeaway

As discussed above, Lih Tai Construction Enterprise appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And a remarkable 138% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Lih Tai Construction Enterprise can keep these trends up, it could have a bright future ahead.

Lih Tai Construction Enterprise does have some risks though, and we've spotted 1 warning sign for Lih Tai Construction Enterprise that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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