What We Make Of Chia Ta World's (TPE:2033) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Chia Ta World (TPE:2033) 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 Chia Ta World:

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

0.0056 = NT$5.8m ÷ (NT$1.2b - NT$157m) (Based on the trailing twelve months to September 2020).

So, Chia Ta World has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 3.6%.

See our latest analysis for Chia Ta World

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

What Can We Tell From Chia Ta World's ROCE Trend?

Chia Ta World has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 0.6%, which is always encouraging. While returns have increased, the amount of capital employed by Chia Ta World has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

One more thing to note, Chia Ta World has decreased current liabilities to 13% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Chia Ta World has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

Our Take On Chia Ta World's ROCE

As discussed above, Chia Ta World appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 48% return over the last five years. In light of that, we think it's worth looking further into this stock because if Chia Ta World can keep these trends up, it could have a bright future ahead.

On a final note, we've found 2 warning signs for Chia Ta World that we think you should be aware of.

While Chia Ta World 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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