Can Everlight Chemical Industrial (TPE:1711) Turn Things Around?

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after we looked into Everlight Chemical Industrial (TPE:1711), the trends above didn't look too great.

What is 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. Analysts use this formula to calculate it for Everlight Chemical Industrial:

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

0.014 = NT$144m ÷ (NT$13b - NT$2.9b) (Based on the trailing twelve months to September 2020).

So, Everlight Chemical Industrial has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 6.7%.

See our latest analysis for Everlight Chemical Industrial

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 want to delve into the historical earnings, revenue and cash flow of Everlight Chemical Industrial, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Everlight Chemical Industrial, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 5.7% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Everlight Chemical Industrial becoming one if things continue as they have.

Our Take On Everlight Chemical Industrial's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. And long term shareholders have watched their investments stay flat over the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we found 3 warning signs for Everlight Chemical Industrial (1 is potentially serious) you should be aware of.

While Everlight Chemical Industrial may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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