Cheng Loong's (TPE:1904) Returns On Capital Are Heading Higher

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Cheng Loong (TPE:1904) and its trend of ROCE, we really liked what we saw.

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

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. Analysts use this formula to calculate it for Cheng Loong:

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

0.11 = NT$5.0b ÷ (NT$61b - NT$17b) (Based on the trailing twelve months to December 2020).

Therefore, Cheng Loong has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 6.3% generated by the Packaging industry.

View our latest analysis for Cheng Loong

Above you can see how the current ROCE for Cheng Loong compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Cheng Loong here for free.

What Can We Tell From Cheng Loong's ROCE Trend?

Cheng Loong is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 160% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

The Bottom Line

In summary, we're delighted to see that Cheng Loong has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a staggering 282% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a final note, we've found 2 warning signs for Cheng Loong that we think you should be aware of.

While Cheng Loong 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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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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