Will The ROCE Trend At Hai Kwang Enterprise (TPE:2038) Continue?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Hai Kwang Enterprise (TPE:2038) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Hai Kwang Enterprise, this is the formula:

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

0.00077 = NT$3.8m ÷ (NT$7.7b - NT$2.7b) (Based on the trailing twelve months to September 2020).

Thus, Hai Kwang Enterprise has an ROCE of 0.08%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 3.6%.

View our latest analysis for Hai Kwang Enterprise

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

What Can We Tell From Hai Kwang Enterprise's ROCE Trend?

Shareholders will be relieved that Hai Kwang Enterprise has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 0.08%, which is always encouraging. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

Our Take On Hai Kwang Enterprise's ROCE

As discussed above, Hai Kwang Enterprise appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a staggering 200% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing: We've identified 2 warning signs with Hai Kwang Enterprise (at least 1 which is significant) , and understanding them would certainly be useful.

While Hai Kwang Enterprise 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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