Will Taita Chemical Company (TPE:1309) Become A Multi-Bagger?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Taita Chemical Company (TPE:1309) looks great, so lets see what the trend can tell us.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Taita Chemical Company, this is the formula:

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

0.25 = NT$1.6b ÷ (NT$8.6b - NT$2.3b) (Based on the trailing twelve months to September 2020).

So, Taita Chemical Company has an ROCE of 25%. That's a fantastic return and not only that, it outpaces the average of 6.7% earned by companies in a similar industry.

See our latest analysis for Taita Chemical Company

In the above chart we have measured Taita Chemical Company'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 Taita Chemical Company.

What Does the ROCE Trend For Taita Chemical Company Tell Us?

Shareholders will be relieved that Taita Chemical Company has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 25%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 26%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Taita Chemical Company has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From Taita Chemical Company's ROCE

In summary, we're delighted to see that Taita Chemical Company has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Taita Chemical Company does have some risks, we noticed 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

Taita Chemical Company is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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