Should We Be Excited About The Trends Of Returns At Formosan Rubber Group (TPE:2107)?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Formosan Rubber Group (TPE:2107) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Formosan Rubber Group, this is the formula:

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

0.069 = NT$760m ÷ (NT$12b - NT$827m) (Based on the trailing twelve months to September 2020).

So, Formosan Rubber Group has an ROCE of 6.9%. Even though it's in line with the industry average of 6.7%, it's still a low return by itself.

See our latest analysis for Formosan Rubber Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Formosan Rubber Group's ROCE against it's prior returns. If you'd like to look at how Formosan Rubber Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Formosan Rubber Group's ROCE Trend?

There hasn't been much to report for Formosan Rubber Group's returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Formosan Rubber Group to be a multi-bagger going forward.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 7.0% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

In Conclusion...

In a nutshell, Formosan Rubber Group has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has gained an impressive 76% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we've found 1 warning sign for Formosan Rubber Group that we think you should be aware of.

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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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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