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

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Having said that, from a first glance at Grand Pacific Petrochemical (TPE:1312) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Grand Pacific Petrochemical is:

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%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 6.9%.

Check out our latest analysis for Grand Pacific Petrochemical

In the above chart we have measured Grand Pacific Petrochemical's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Grand Pacific Petrochemical's ROCE Trending?

When we looked at the ROCE trend at Grand Pacific Petrochemical, we didn't gain much confidence. Around five years ago the returns on capital were 7.5%, but since then they've fallen to 2.5%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

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 66% return over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you're still interested in Grand Pacific Petrochemical it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

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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