Returns On Capital At Tsann Kuen EnterpriseLtd (TPE:2430) Paint An Interesting Picture

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. 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 investigating Tsann Kuen EnterpriseLtd (TPE:2430), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Tsann Kuen EnterpriseLtd is:

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

0.043 = NT$375m ÷ (NT$14b - NT$5.1b) (Based on the trailing twelve months to September 2020).

Therefore, Tsann Kuen EnterpriseLtd has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 8.4%.

See our latest analysis for Tsann Kuen EnterpriseLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tsann Kuen EnterpriseLtd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Tsann Kuen EnterpriseLtd, check out these free graphs here.

What Can We Tell From Tsann Kuen EnterpriseLtd's ROCE Trend?

In terms of Tsann Kuen EnterpriseLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 8.5% over the last five years. However it looks like Tsann Kuen EnterpriseLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Tsann Kuen EnterpriseLtd's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 20% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

On a final note, we found 2 warning signs for Tsann Kuen EnterpriseLtd (1 can't be ignored) you should be aware of.

While Tsann Kuen EnterpriseLtd 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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