Some Investors May Be Worried About CHC Resources' (TPE:9930) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 CHC Resources (TPE:9930) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for CHC Resources, this is the formula:

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

0.094 = NT$968m ÷ (NT$13b - NT$2.9b) (Based on the trailing twelve months to December 2020).

Therefore, CHC Resources has an ROCE of 9.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.5%.

Check out our latest analysis for CHC Resources

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of CHC Resources, check out these free graphs here.

The Trend Of ROCE

When we looked at the ROCE trend at CHC Resources, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.4% from 22% five years ago. 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 may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From CHC Resources' ROCE

Bringing it all together, while we're somewhat encouraged by CHC Resources' reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 3.6% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

On a separate note, we've found 2 warning signs for CHC Resources you'll probably want to know about.

While CHC Resources 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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