Has Ta Chen Stainless Pipe (TPE:2027) Got What It Takes To Become A Multi-Bagger?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Ta Chen Stainless Pipe (TPE:2027), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Ta Chen Stainless Pipe is:

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

0.0083 = NT$640m ÷ (NT$104b - NT$26b) (Based on the trailing twelve months to September 2020).

Therefore, Ta Chen Stainless Pipe has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 3.6%.

Check out our latest analysis for Ta Chen Stainless Pipe

Above you can see how the current ROCE for Ta Chen Stainless Pipe compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Ta Chen Stainless Pipe.

What Can We Tell From Ta Chen Stainless Pipe's ROCE Trend?

When we looked at the ROCE trend at Ta Chen Stainless Pipe, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 0.8% from 1.8% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Ta Chen Stainless Pipe's ROCE

In summary, we're somewhat concerned by Ta Chen Stainless Pipe's diminishing returns on increasing amounts of capital. Since the stock has skyrocketed 142% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Ta Chen Stainless Pipe does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

While Ta Chen Stainless Pipe may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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