Will the Promising Trends At Huikwang (GTSM:6508) Continue?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Huikwang (GTSM:6508) and its trend of ROCE, we really liked what we saw.

Understanding 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 Huikwang:

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

0.13 = NT$309m ÷ (NT$3.1b - NT$713m) (Based on the trailing twelve months to September 2020).

Therefore, Huikwang has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 6.7% generated by the Chemicals industry.

View our latest analysis for Huikwang

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

So How Is Huikwang's ROCE Trending?

Huikwang has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 28% 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. 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.

Our Take On Huikwang's ROCE

To bring it all together, Huikwang has done well to increase the returns it's generating from its capital employed. And with a respectable 56% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

Huikwang does have some risks though, and we've spotted 2 warning signs for Huikwang that you might be interested in.

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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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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