Will The ROCE Trend At Cheng Loong (TPE:1904) Continue?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Cheng Loong (TPE:1904) looks quite promising in regards to its trends of return on capital.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Cheng Loong is:

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

0.11 = NT$4.9b ÷ (NT$59b - NT$16b) (Based on the trailing twelve months to September 2020).

So, Cheng Loong has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Packaging industry average of 6.0% it's much better.

Check out 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.

So How Is Cheng Loong's ROCE Trending?

Cheng Loong's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 101% 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. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Bottom Line On Cheng Loong's ROCE

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. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. 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.

Like most companies, Cheng Loong does come with some risks, and we've found 2 warning signs that you should be aware of.

While Cheng Loong isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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