Stock Analysis

What Can The Trends At Tung Ho Steel Enterprise (TPE:2006) Tell Us About Their Returns?

TWSE:2006
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To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Tung Ho Steel Enterprise (TPE:2006) and its trend of ROCE, we really liked what we saw.

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. Analysts use this formula to calculate it for Tung Ho Steel Enterprise:

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

0.12 = NT$3.5b ÷ (NT$45b - NT$16b) (Based on the trailing twelve months to September 2020).

So, Tung Ho Steel Enterprise has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 3.6% generated by the Metals and Mining industry.

View our latest analysis for Tung Ho Steel Enterprise

roce
TSEC:2006 Return on Capital Employed February 6th 2021

Above you can see how the current ROCE for Tung Ho Steel Enterprise 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 Tung Ho Steel Enterprise here for free.

The Trend Of ROCE

Tung Ho Steel Enterprise has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 125% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

What We Can Learn From Tung Ho Steel Enterprise's ROCE

To sum it up, Tung Ho Steel Enterprise is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 141% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you'd like to know about the risks facing Tung Ho Steel Enterprise, we've discovered 2 warning signs that you should be aware of.

While Tung Ho Steel Enterprise 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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