Why We Like The Returns At Hotai MotorLtd (TPE:2207)

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Hotai MotorLtd (TPE:2207) looks great, so lets see what the trend can tell us.

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 Hotai MotorLtd, this is the formula:

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

0.22 = NT$21b ÷ (NT$271b - NT$172b) (Based on the trailing twelve months to September 2020).

Therefore, Hotai MotorLtd has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 8.4%.

View our latest analysis for Hotai MotorLtd

Above you can see how the current ROCE for Hotai MotorLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Hotai MotorLtd here for free.

What Can We Tell From Hotai MotorLtd's ROCE Trend?

We like the trends that we're seeing from Hotai MotorLtd. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 22%. The amount of capital employed has increased too, by 48%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, Hotai MotorLtd's current liabilities are still rather high at 63% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Hotai MotorLtd's ROCE

To sum it up, Hotai MotorLtd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Hotai MotorLtd can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing Hotai MotorLtd, we've discovered 1 warning sign that you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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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