Should We Be Excited About The Trends Of Returns At Formosan Union Chemical (TPE:1709)?

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Formosan Union Chemical (TPE:1709), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Formosan Union Chemical:

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

0.069 = NT$558m ÷ (NT$11b - NT$2.9b) (Based on the trailing twelve months to September 2020).

Therefore, Formosan Union Chemical has an ROCE of 6.9%. Even though it's in line with the industry average of 6.7%, it's still a low return by itself.

See our latest analysis for Formosan Union Chemical

Historical performance is a great place to start when researching a stock so above you can see the gauge for Formosan Union Chemical's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Formosan Union Chemical, check out these free graphs here.

What Can We Tell From Formosan Union Chemical's ROCE Trend?

Things have been pretty stable at Formosan Union Chemical, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at Formosan Union Chemical in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

What We Can Learn From 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 49% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Formosan Union Chemical (of which 1 can't be ignored!) that you should know about.

While Formosan Union Chemical isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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