Should We Be Excited About The Trends Of Returns At Grand Pacific Petrochemical (TPE:1312)?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Grand Pacific Petrochemical (TPE:1312) and its ROCE trend, we weren't exactly thrilled.

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 Grand Pacific Petrochemical:

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

0.025 = NT$768m ÷ (NT$33b - NT$2.5b) (Based on the trailing twelve months to September 2020).

Therefore, Grand Pacific Petrochemical has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 6.7%.

Check out our latest analysis for Grand Pacific Petrochemical

Above you can see how the current ROCE for Grand Pacific Petrochemical compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Grand Pacific Petrochemical.

So How Is Grand Pacific Petrochemical's ROCE Trending?

In terms of Grand Pacific Petrochemical's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 7.5% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Key Takeaway

In summary, we're somewhat concerned by Grand Pacific Petrochemical's diminishing returns on increasing amounts of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 79% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

While Grand Pacific Petrochemical doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

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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