Ruentex MaterialsLtd (TPE:8463) Will Be Looking To Turn Around Its Returns

When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at Ruentex MaterialsLtd (TPE:8463), so let's see why.

What is 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 Ruentex MaterialsLtd:

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

0.04 = NT$164m ÷ (NT$5.5b - NT$1.4b) (Based on the trailing twelve months to December 2020).

Thus, Ruentex MaterialsLtd has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 8.4%.

View our latest analysis for Ruentex MaterialsLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ruentex MaterialsLtd's ROCE against it's prior returns. If you'd like to look at how Ruentex MaterialsLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Ruentex MaterialsLtd's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 6.8% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Ruentex MaterialsLtd to turn into a multi-bagger.

What We Can Learn From Ruentex MaterialsLtd's ROCE

In summary, it's unfortunate that Ruentex MaterialsLtd is generating lower returns from the same amount of capital. Since the stock has skyrocketed 127% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a final note, we found 3 warning signs for Ruentex MaterialsLtd (2 are concerning) you should be aware of.

While Ruentex MaterialsLtd 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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