Should You Worry About Yuen Chang Stainless Steel Co., Ltd.’s (TPE:2069) ROCE?

Today we’ll evaluate Yuen Chang Stainless Steel Co., Ltd. (TPE:2069) to determine whether it could have potential as an investment idea. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

Firstly, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.

So, How Do We Calculate ROCE?

The formula for calculating the return on capital employed is:

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

Or for Yuen Chang Stainless Steel:

0.019 = NT$97m ÷ (NT$8.1b – NT$3.0b) (Based on the trailing twelve months to December 2019.)

Therefore, Yuen Chang Stainless Steel has an ROCE of 1.9%.

Check out our latest analysis for Yuen Chang Stainless Steel

Does Yuen Chang Stainless Steel Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, Yuen Chang Stainless Steel’s ROCE appears to be significantly below the 5.9% average in the Metals and Mining industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Regardless of how Yuen Chang Stainless Steel stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.

We can see that, Yuen Chang Stainless Steel currently has an ROCE of 1.9%, less than the 12% it reported 3 years ago. So investors might consider if it has had issues recently. The image below shows how Yuen Chang Stainless Steel’s ROCE compares to its industry, and you can click it to see more detail on its past growth.

TSEC:2069 Past Revenue and Net Income, March 25th 2020
TSEC:2069 Past Revenue and Net Income, March 25th 2020

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. We note Yuen Chang Stainless Steel could be considered a cyclical business. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

How Yuen Chang Stainless Steel’s Current Liabilities Impact Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Yuen Chang Stainless Steel has current liabilities of NT$3.0b and total assets of NT$8.1b. As a result, its current liabilities are equal to approximately 37% of its total assets. In light of sufficient current liabilities to noticeably boost the ROCE, Yuen Chang Stainless Steel’s ROCE is concerning.

The Bottom Line On Yuen Chang Stainless Steel’s ROCE

This company may not be the most attractive investment prospect. Of course, you might also be able to find a better stock than Yuen Chang Stainless Steel. So you may wish to see this free collection of other companies that have grown earnings strongly.

I will like Yuen Chang Stainless Steel better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.