Taiwan Fertilizer (TPE:1722) Will Be Hoping To Turn Its Returns On Capital 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? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. Having said that, after a brief look, Taiwan Fertilizer (TPE:1722) we aren't filled with optimism, but let's investigate further.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Taiwan Fertilizer, this is the formula:

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

0.017 = NT$1.2b ÷ (NT$76b - NT$2.2b) (Based on the trailing twelve months to December 2020).

So, Taiwan Fertilizer has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 7.5%.

See our latest analysis for Taiwan Fertilizer

Above you can see how the current ROCE for Taiwan Fertilizer compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Taiwan Fertilizer.

So How Is Taiwan Fertilizer's ROCE Trending?

In terms of Taiwan Fertilizer's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 3.0% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Taiwan Fertilizer to turn into a multi-bagger.

The Key Takeaway

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 85% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One more thing: We've identified 3 warning signs with Taiwan Fertilizer (at least 2 which are concerning) , and understanding these would certainly be useful.

While Taiwan Fertilizer 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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