Returns On Capital At All Cosmos Bio-Tech Holding (TPE:4148) Paint An Interesting Picture

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Having said that, from a first glance at All Cosmos Bio-Tech Holding (TPE:4148) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for All Cosmos Bio-Tech Holding, this is the formula:

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

0.034 = NT$78m ÷ (NT$2.5b - NT$163m) (Based on the trailing twelve months to September 2020).

Thus, All Cosmos Bio-Tech Holding has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 6.7%.

View our latest analysis for All Cosmos Bio-Tech Holding

In the above chart we have measured All Cosmos Bio-Tech Holding's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering All Cosmos Bio-Tech Holding here for free.

What Can We Tell From All Cosmos Bio-Tech Holding's ROCE Trend?

On the surface, the trend of ROCE at All Cosmos Bio-Tech Holding doesn't inspire confidence. To be more specific, ROCE has fallen from 17% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, All Cosmos Bio-Tech Holding has decreased its current liabilities to 6.5% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From All Cosmos Bio-Tech Holding's ROCE

We're a bit apprehensive about All Cosmos Bio-Tech Holding because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 67% over the last three years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

All Cosmos Bio-Tech Holding does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those 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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