Is Yung Chi Paint & Varnish Mfg.Co.Ltd (TPE:1726) Headed For Trouble?

What financial metrics can indicate to us that a company is maturing or even in decline? 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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after we looked into Yung Chi Paint & Varnish Mfg.Co.Ltd (TPE:1726), the trends above didn't look too great.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Yung Chi Paint & Varnish Mfg.Co.Ltd:

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

0.11 = NT$946m ÷ (NT$9.7b - NT$1b) (Based on the trailing twelve months to September 2020).

Thus, Yung Chi Paint & Varnish Mfg.Co.Ltd has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 6.7% it's much better.

See our latest analysis for Yung Chi Paint & Varnish Mfg.Co.Ltd

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 Yung Chi Paint & Varnish Mfg.Co.Ltd, check out these free graphs here.

How Are Returns Trending?

In terms of Yung Chi Paint & Varnish Mfg.Co.Ltd's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 15% 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. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Yung Chi Paint & Varnish Mfg.Co.Ltd to turn into a multi-bagger.

The Bottom Line

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors must expect better things on the horizon though because the stock has risen 24% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One more thing to note, we've identified 1 warning sign with Yung Chi Paint & Varnish Mfg.Co.Ltd and understanding it should be part of your investment process.

While Yung Chi Paint & Varnish Mfg.Co.Ltd 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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