Returns Are Gaining Momentum At Kao Hsing Chang Iron & Steel (TWSE:2008)

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'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. So on that note, Kao Hsing Chang Iron & Steel (TWSE:2008) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Kao Hsing Chang Iron & Steel:

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

0.016 = NT$89m ÷ (NT$7.5b - NT$1.9b) (Based on the trailing twelve months to December 2023).

Thus, Kao Hsing Chang Iron & Steel has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 7.2%.

Check out our latest analysis for Kao Hsing Chang Iron & Steel

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're interested in investigating Kao Hsing Chang Iron & Steel's past further, check out this free graph covering Kao Hsing Chang Iron & Steel's past earnings, revenue and cash flow.

So How Is Kao Hsing Chang Iron & Steel's ROCE Trending?

Kao Hsing Chang Iron & Steel has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 1.6% on its capital. In addition to that, Kao Hsing Chang Iron & Steel is employing 116% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a related note, the company's ratio of current liabilities to total assets has decreased to 25%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

What We Can Learn From Kao Hsing Chang Iron & Steel's ROCE

Long story short, we're delighted to see that Kao Hsing Chang Iron & Steel's reinvestment activities have paid off and the company is now profitable. And a remarkable 111% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to know some of the risks facing Kao Hsing Chang Iron & Steel we've found 3 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

While Kao Hsing Chang Iron & Steel may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.