Tex Year Industries (TPE:4720) May Have Issues Allocating Its Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 Tex Year Industries (TPE:4720) 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)?

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. To calculate this metric for Tex Year Industries, this is the formula:

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

0.07 = NT$137m ÷ (NT$3.1b - NT$1.1b) (Based on the trailing twelve months to December 2020).

So, Tex Year Industries has an ROCE of 7.0%. On its own, that's a low figure but it's around the 7.7% average generated by the Chemicals industry.

View our latest analysis for Tex Year Industries

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 want to delve into the historical earnings, revenue and cash flow of Tex Year Industries, check out these free graphs here.

The Trend Of ROCE

In terms of Tex Year Industries' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 7.0% from 9.0% five years ago. However it looks like Tex Year Industries might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Tex Year Industries' ROCE

In summary, Tex Year Industries is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And with the stock having returned a mere 13% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you'd like to know more about Tex Year Industries, we've spotted 3 warning signs, and 2 of them make us uncomfortable.

While Tex Year Industries 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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