Chung Hwa Chemical Industrial Works' (TWSE:1727) Returns Have Hit A Wall

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Chung Hwa Chemical Industrial Works (TWSE:1727) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Chung Hwa Chemical Industrial Works, this is the formula:

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

0.031 = NT$71m ÷ (NT$3.0b - NT$767m) (Based on the trailing twelve months to December 2024).

So, Chung Hwa Chemical Industrial Works has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 6.0%.

See our latest analysis for Chung Hwa Chemical Industrial Works

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

How Are Returns Trending?

The returns on capital haven't changed much for Chung Hwa Chemical Industrial Works in recent years. Over the past five years, ROCE has remained relatively flat at around 3.1% and the business has deployed 52% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, Chung Hwa Chemical Industrial Works has done well to reduce current liabilities to 25% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

What We Can Learn From Chung Hwa Chemical Industrial Works' ROCE

Long story short, while Chung Hwa Chemical Industrial Works has been reinvesting its capital, the returns that it's generating haven't increased. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 219% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Chung Hwa Chemical Industrial Works (of which 2 can't be ignored!) that you should know about.

While Chung Hwa Chemical Industrial Works 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.