Will the Promising Trends At Ho Tung Chemical (TPE:1714) Continue?

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Ho Tung Chemical (TPE:1714) and its trend of ROCE, we really liked what we saw.

What is 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. To calculate this metric for Ho Tung Chemical, this is the formula:

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

0.17 = NT$3.3b ÷ (NT$24b - NT$4.6b) (Based on the trailing twelve months to September 2020).

So, Ho Tung Chemical has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 6.7% generated by the Chemicals industry.

See our latest analysis for Ho Tung 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 Ho Tung Chemical has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Ho Tung Chemical's ROCE Trending?

We're delighted to see that Ho Tung Chemical is reaping rewards from its investments and has now broken into profitability. The company now earns 17% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Ho Tung Chemical has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

On a related note, the company's ratio of current liabilities to total assets has decreased to 19%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

In Conclusion...

To sum it up, Ho Tung Chemical is collecting higher returns from the same amount of capital, and that's impressive. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 47% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.

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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