What Do The Returns On Capital At Double Bond Chemical Ind (TPE:4764) Tell Us?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. In light of that, when we looked at Double Bond Chemical Ind (TPE:4764) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. 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)

0.024 = NT$69m ÷ (NT$4.6b - NT$1.7b) (Based on the trailing twelve months to September 2020).

Therefore, Double Bond Chemical Ind has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 6.7%.

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?

When we looked at the ROCE trend at Double Bond Chemical Ind, we didn't gain much confidence. To be more specific, ROCE has fallen from 30% over the last five years. 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 side note, Double Bond Chemical Ind has done well to pay down its current liabilities to 38% of total assets. That could partly explain why the ROCE has dropped. 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.

Our Take On Double Bond Chemical Ind's ROCE

In summary, we're somewhat concerned by Double Bond Chemical Ind's diminishing returns on increasing amounts of capital. In spite of that, the stock has delivered a 22% return to shareholders who held over the last three years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you'd like to know more about Double Bond Chemical Ind, we've spotted 3 warning signs, and 2 of them are potentially serious.

While Double Bond Chemical Ind isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

If you’re looking to trade Double Bond Chemical Ind, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.