Ta Chen Stainless Pipe (TWSE:2027) May Have Issues Allocating Its Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. However, after briefly looking over the numbers, we don't think Ta Chen Stainless Pipe (TWSE:2027) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Ta Chen Stainless Pipe, this is the formula:

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

0.054 = NT$5.9b ÷ (NT$135b - NT$26b) (Based on the trailing twelve months to September 2024).

Thus, Ta Chen Stainless Pipe has an ROCE of 5.4%. In absolute terms, that's a low return but it's around the Metals and Mining industry average of 6.3%.

See our latest analysis for Ta Chen Stainless Pipe

Above you can see how the current ROCE for Ta Chen Stainless Pipe compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Ta Chen Stainless Pipe .

So How Is Ta Chen Stainless Pipe's ROCE Trending?

On the surface, the trend of ROCE at Ta Chen Stainless Pipe doesn't inspire confidence. To be more specific, ROCE has fallen from 8.5% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Key Takeaway

We're a bit apprehensive about Ta Chen Stainless Pipe because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Yet despite these concerning fundamentals, the stock has performed strongly with a 72% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Ta Chen Stainless Pipe does have some risks though, and we've spotted 2 warning signs for Ta Chen Stainless Pipe that you might be interested in.

While Ta Chen Stainless Pipe 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.