The Returns At Far Eastern Department Stores (TPE:2903) Provide Us With Signs Of What's To Come

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Although, when we looked at Far Eastern Department Stores (TPE:2903), it didn't seem to tick all of these boxes.

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 Far Eastern Department Stores:

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

0.051 = NT$4.1b ÷ (NT$123b - NT$42b) (Based on the trailing twelve months to September 2020).

Thus, Far Eastern Department Stores has an ROCE of 5.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.1%.

See our latest analysis for Far Eastern Department Stores

Above you can see how the current ROCE for Far Eastern Department Stores compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at Far Eastern Department Stores. The company has employed 22% more capital in the last five years, and the returns on that capital have remained stable at 5.1%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

In Conclusion...

In conclusion, Far Eastern Department Stores has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 80% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know about the risks facing Far Eastern Department Stores, we've discovered 3 warning signs that you should be aware of.

While Far Eastern Department Stores 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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