Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Chun Yuan Steel Industry (TPE:2010) so let's look a bit deeper.
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. Analysts use this formula to calculate it for Chun Yuan Steel Industry:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.031 = NT$360m ÷ (NT$18b - NT$6.7b) (Based on the trailing twelve months to September 2020).
Therefore, Chun Yuan Steel Industry has an ROCE of 3.1%. In absolute terms, that's a low return but it's around the Metals and Mining industry average of 3.6%.
Above you can see how the current ROCE for Chun Yuan Steel Industry 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 Chun Yuan Steel Industry here for free.
So How Is Chun Yuan Steel Industry's ROCE Trending?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 63% 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 Chun Yuan Steel Industry's ROCE
To sum it up, Chun Yuan Steel Industry is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a solid 75% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
If you'd like to know more about Chun Yuan Steel Industry, we've spotted 3 warning signs, and 2 of them make us uncomfortable.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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