Should We Be Excited About The Trends Of Returns At Keding Enterprises (TPE:6655)?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Keding Enterprises (TPE:6655) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. Analysts use this formula to calculate it for Keding Enterprises:

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

0.08 = NT$334m ÷ (NT$5.3b - NT$1.1b) (Based on the trailing twelve months to September 2020).

So, Keding Enterprises has an ROCE of 8.0%. On its own that's a low return, but compared to the average of 6.5% generated by the Forestry industry, it's much better.

See our latest analysis for Keding Enterprises

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

So How Is Keding Enterprises' ROCE Trending?

When we looked at the ROCE trend at Keding Enterprises, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 8.0% from 16% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

In Conclusion...

We're a bit apprehensive about Keding Enterprises because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors must expect better things on the horizon though because the stock has risen 4.0% 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.

One more thing to note, we've identified 2 warning signs with Keding Enterprises and understanding them should be part of your investment process.

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

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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.
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