Here's What To Make Of Formosan Union Chemical's (TPE:1709) Decelerating Rates Of Return

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 Formosan Union Chemical (TPE:1709) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Formosan Union Chemical, this is the formula:

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

0.086 = NT$709m ÷ (NT$11b - NT$2.9b) (Based on the trailing twelve months to December 2020).

So, Formosan Union Chemical has an ROCE of 8.6%. On its own, that's a low figure but it's around the 7.8% average generated by the Chemicals industry.

View our latest analysis for Formosan Union Chemical

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Formosan Union Chemical has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Over the past five years, Formosan Union Chemical's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Formosan Union Chemical to be a multi-bagger going forward.

Our Take On Formosan Union Chemical's ROCE

In a nutshell, Formosan Union Chemical has been trudging along with the same returns from the same amount of capital over the last five years. Although the market must be expecting these trends to improve because the stock has gained 43% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know more about Formosan Union Chemical, we've spotted 2 warning signs, and 1 of them is concerning.

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