Pan German Universal Motors (TPE:2247) Might Be Having Difficulty Using Its Capital Effectively

If you're looking for a multi-bagger, there's a few things to 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Pan German Universal Motors (TPE:2247) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Pan German Universal Motors:

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

0.091 = NT$1.3b ÷ (NT$19b - NT$4.3b) (Based on the trailing twelve months to December 2020).

Thus, Pan German Universal Motors has an ROCE of 9.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.9%.

See our latest analysis for Pan German Universal Motors

In the above chart we have measured Pan German Universal Motors' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Pan German Universal Motors.

What Does the ROCE Trend For Pan German Universal Motors Tell Us?

On the surface, the trend of ROCE at Pan German Universal Motors doesn't inspire confidence. Around five years ago the returns on capital were 24%, but since then they've fallen to 9.1%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Pan German Universal Motors is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 8.2% over the last three years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Pan German Universal Motors (of which 1 can't be ignored!) that you should know about.

While Pan German Universal Motors 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. 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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