If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Yuen Chang Stainless Steel (TPE:2069), we don't think it's current trends fit the mold of a multi-bagger.
Understanding 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. The formula for this calculation on Yuen Chang Stainless Steel is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.018 = NT$83m ÷ (NT$8.1b - NT$3.6b) (Based on the trailing twelve months to September 2020).
Thus, Yuen Chang Stainless Steel has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 3.6%.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Yuen Chang Stainless Steel has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Yuen Chang Stainless Steel Tell Us?
When we looked at the ROCE trend at Yuen Chang Stainless Steel, we didn't gain much confidence. Around five years ago the returns on capital were 4.5%, but since then they've fallen to 1.8%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
On a side note, Yuen Chang Stainless Steel's current liabilities are still rather high at 45% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line On Yuen Chang Stainless Steel's ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for Yuen Chang Stainless Steel have fallen, meanwhile the business is employing more capital than it was five years ago. Long term shareholders who've owned the stock over the last three years have experienced a 21% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
On a final note, we found 4 warning signs for Yuen Chang Stainless Steel (1 is a bit concerning) you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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