Chih Lien Industrial's (TPE:2024) Returns Have Hit A Wall

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. In light of that, when we looked at Chih Lien Industrial (TPE:2024) and its ROCE trend, we weren't exactly thrilled.

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 Chih Lien Industrial:

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

0.028 = NT$36m ÷ (NT$1.9b - NT$630m) (Based on the trailing twelve months to December 2020).

Thus, Chih Lien Industrial has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 4.2%.

See our latest analysis for Chih Lien Industrial

Historical performance is a great place to start when researching a stock so above you can see the gauge for Chih Lien Industrial's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Chih Lien Industrial, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

There hasn't been much to report for Chih Lien Industrial's returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at Chih Lien Industrial in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

The Bottom Line

In a nutshell, Chih Lien Industrial has been trudging along with the same returns from the same amount of capital over the last five years. Yet to long term shareholders the stock has gifted them an incredible 280% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Chih Lien Industrial does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those can't be ignored...

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