Can Formosa Chemicals & Fibre (TPE:1326) Turn Things Around?

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. Having said that, after a brief look, Formosa Chemicals & Fibre (TPE:1326) we aren't filled with optimism, but let's investigate further.

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 Formosa Chemicals & Fibre:

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

0.017 = NT$7.0b ÷ (NT$488b - NT$76b) (Based on the trailing twelve months to September 2020).

So, Formosa Chemicals & Fibre has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 6.8%.

See our latest analysis for Formosa Chemicals & Fibre

Above you can see how the current ROCE for Formosa Chemicals & Fibre compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at Formosa Chemicals & Fibre. Unfortunately the returns on capital have diminished from the 2.7% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Formosa Chemicals & Fibre becoming one if things continue as they have.

Our Take On Formosa Chemicals & Fibre's ROCE

In summary, it's unfortunate that Formosa Chemicals & Fibre is generating lower returns from the same amount of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 49% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know about the risks facing Formosa Chemicals & Fibre, we've discovered 2 warning signs that 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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