Double Bond Chemical Ind (TPE:4764) Will Be Hoping To Turn Its Returns On Capital Around

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. In light of that, when we looked at Double Bond Chemical Ind (TPE:4764) and its ROCE trend, we weren't exactly thrilled.

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

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. Analysts use this formula to calculate it for Double Bond Chemical Ind:

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

0.03 = NT$90m ÷ (NT$4.5b - NT$1.5b) (Based on the trailing twelve months to December 2020).

So, Double Bond Chemical Ind has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 7.7%.

View our latest analysis for Double Bond Chemical Ind

Historical performance is a great place to start when researching a stock so above you can see the gauge for Double Bond Chemical Ind's ROCE against it's prior returns. If you're interested in investigating Double Bond Chemical Ind's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Double Bond Chemical Ind Tell Us?

In terms of Double Bond Chemical Ind's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 3.0% from 28% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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, Double Bond Chemical Ind has decreased its current liabilities to 34% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

In summary, we're somewhat concerned by Double Bond Chemical Ind's diminishing returns on increasing amounts of capital. Investors must expect better things on the horizon though because the stock has risen 21% in the last three years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

On a final note, we found 3 warning signs for Double Bond Chemical Ind (2 don't sit too well with us) 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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