Returns On Capital Signal Tricky Times Ahead For Nan Pao Resins Chemical (TPE:4766)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Nan Pao Resins Chemical (TPE:4766) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is 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. The formula for this calculation on Nan Pao Resins Chemical is:

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

0.11 = NT$1.5b ÷ (NT$19b - NT$5.1b) (Based on the trailing twelve months to December 2020).

Therefore, Nan Pao Resins Chemical has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 7.7% generated by the Chemicals industry.

See our latest analysis for Nan Pao Resins Chemical

In the above chart we have measured Nan Pao Resins Chemical'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 Nan Pao Resins Chemical here for free.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Nan Pao Resins Chemical, we didn't gain much confidence. To be more specific, ROCE has fallen from 21% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Nan Pao Resins Chemical's ROCE

Bringing it all together, while we're somewhat encouraged by Nan Pao Resins Chemical's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 32% over the last three years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Like most companies, Nan Pao Resins Chemical does come with some risks, and we've found 1 warning sign that you should be aware of.

While Nan Pao Resins Chemical 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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