Returns Are Gaining Momentum At Hai Kwang Enterprise (TWSE:2038)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Hai Kwang Enterprise (TWSE:2038) so let's look a bit deeper.

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. To calculate this metric for Hai Kwang Enterprise, this is the formula:

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

0.0088 = NT$48m ÷ (NT$9.6b - NT$4.1b) (Based on the trailing twelve months to June 2024).

So, Hai Kwang Enterprise has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 6.4%.

See our latest analysis for Hai Kwang Enterprise

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 , check out these free graphs detailing revenue and cash flow performance of Hai Kwang Enterprise.

How Are Returns Trending?

The fact that Hai Kwang Enterprise is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 0.9% on its capital. In addition to that, Hai Kwang Enterprise is employing 24% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

Another thing to note, Hai Kwang Enterprise has a high ratio of current liabilities to total assets of 43%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Hai Kwang Enterprise's ROCE

Overall, Hai Kwang Enterprise gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Since the stock has returned a staggering 200% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Hai Kwang Enterprise can keep these trends up, it could have a bright future ahead.

Hai Kwang Enterprise does have some risks, we noticed 3 warning signs (and 1 which is significant) we think you should know about.

While Hai Kwang Enterprise 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.