YC InoxLtd (TPE:2034) Could Be Struggling To Allocate Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think YC InoxLtd (TPE:2034) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 YC InoxLtd:

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

0.043 = NT$465m ÷ (NT$13b - NT$2.4b) (Based on the trailing twelve months to December 2020).

Therefore, YC InoxLtd has an ROCE of 4.3%. Even though it's in line with the industry average of 4.3%, it's still a low return by itself.

Check out our latest analysis for YC InoxLtd

In the above chart we have measured YC InoxLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

We weren't thrilled with the trend because YC InoxLtd's ROCE has reduced by 42% over the last five years, while the business employed 43% more capital. Usually this isn't ideal, but given YC InoxLtd conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence YC InoxLtd might not have received a full period of earnings contribution from it.

The Bottom Line On YC InoxLtd's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for YC InoxLtd have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 96% return to shareholders over the last five years, so investors might be expecting the trends to turn around. 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 YC InoxLtd, we've spotted 3 warning signs, and 1 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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