What Can The Trends At Chuwa Wool Industry (Taiwan) (TPE:1439) Tell Us About Their Returns?

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Chuwa Wool Industry (Taiwan)'s (TPE:1439) returns on capital, so let's have a look.

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 Chuwa Wool Industry (Taiwan):

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

0.014 = NT$33m ÷ (NT$2.3b - NT$14m) (Based on the trailing twelve months to September 2020).

So, Chuwa Wool Industry (Taiwan) has an ROCE of 1.4%. In absolute terms, that's a low return and it also under-performs the Retail Distributors industry average of 6.2%.

View our latest analysis for Chuwa Wool Industry (Taiwan)

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

What Does the ROCE Trend For Chuwa Wool Industry (Taiwan) Tell Us?

Shareholders will be relieved that Chuwa Wool Industry (Taiwan) has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 1.4% on its capital. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Bottom Line On Chuwa Wool Industry (Taiwan)'s ROCE

To sum it up, Chuwa Wool Industry (Taiwan) is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 129% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Like most companies, Chuwa Wool Industry (Taiwan) does come with some risks, and we've found 4 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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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