If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Taiwan Hopax Chems.Mfg.Co.Ltd (GTSM:6509) so let's look a bit deeper.
Return On Capital Employed (ROCE): What is it?
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 Taiwan Hopax Chems.Mfg.Co.Ltd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = NT$381m ÷ (NT$5.6b - NT$2.1b) (Based on the trailing twelve months to September 2020).
So, Taiwan Hopax Chems.Mfg.Co.Ltd has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 6.7% generated by the Chemicals industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Taiwan Hopax Chems.Mfg.Co.Ltd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Taiwan Hopax Chems.Mfg.Co.Ltd, check out these free graphs here.
So How Is Taiwan Hopax Chems.Mfg.Co.Ltd's ROCE Trending?
Taiwan Hopax Chems.Mfg.Co.Ltd is showing promise given that its ROCE is trending up and to the right. 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 111% 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. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
What We Can Learn From Taiwan Hopax Chems.Mfg.Co.Ltd's ROCE
To sum it up, Taiwan Hopax Chems.Mfg.Co.Ltd is collecting higher returns from the same amount of capital, and that's impressive. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 48% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
On a final note, we've found 2 warning signs for Taiwan Hopax Chems.Mfg.Co.Ltd that we think you should be aware of.
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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