Our Take On The Returns On Capital At CHC Resources (TPE:9930)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Although, when we looked at CHC Resources (TPE:9930), it didn't seem to tick all of these boxes.

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. The formula for this calculation on CHC Resources is:

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

0.10 = NT$958m ÷ (NT$12b - NT$2.1b) (Based on the trailing twelve months to September 2020).

Thus, CHC Resources has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Basic Materials industry average of 8.2% it's much better.

See our latest analysis for CHC Resources

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

The Trend Of ROCE

When we looked at the ROCE trend at CHC Resources, we didn't gain much confidence. To be more specific, ROCE has fallen from 25% over the last five years. However it looks like CHC Resources 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

To conclude, we've found that CHC Resources is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 0.2% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Like most companies, CHC Resources does come with some risks, and we've found 2 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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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