Does Chih Lien Industrial's (TPE:2024) Returns On Capital Reflect Well On The Business?

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Chih Lien Industrial (TPE:2024), we've spotted some signs that it could be struggling, so let's investigate.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.01 = NT$13m ÷ (NT$2.0b - NT$689m) (Based on the trailing twelve months to September 2020).

So, Chih Lien Industrial has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 3.6%.

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'd like to look at how Chih Lien Industrial has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Chih Lien Industrial's ROCE Trending?

We are a bit worried about the trend of returns on capital at Chih Lien Industrial. About five years ago, returns on capital were 3.1%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Chih Lien Industrial becoming one if things continue as they have.

Our Take On Chih Lien Industrial's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 212%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know more about Chih Lien Industrial, we've spotted 5 warning signs, and 2 of them can't be ignored.

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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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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