Should We Be Excited About The Trends Of Returns At 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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Nan Pao Resins Chemical (TPE:4766), it didn't seem to tick all of these boxes.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its 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$18b - NT$4.7b) (Based on the trailing twelve months to September 2020).

Thus, Nan Pao Resins Chemical has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 6.7% it's much better.

View our latest analysis for Nan Pao Resins Chemical

Above you can see how the current ROCE for Nan Pao Resins Chemical compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Nan Pao Resins Chemical.

So How Is Nan Pao Resins Chemical's ROCE Trending?

In terms of Nan Pao Resins Chemical's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 19%, but since then they've fallen to 11%. However it looks like Nan Pao Resins Chemical 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.

In Conclusion...

In summary, Nan Pao Resins Chemical is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 28% over the last three years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

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.

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