Hotai MotorLtd (TWSE:2207) Is Reinvesting To Multiply In Value

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. With that in mind, the ROCE of Hotai MotorLtd (TWSE:2207) looks attractive right now, so lets see what the trend of returns can tell us.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Hotai MotorLtd is:

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

0.22 = NT$33b ÷ (NT$507b - NT$359b) (Based on the trailing twelve months to September 2024).

Therefore, Hotai MotorLtd has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 6.8% earned by companies in a similar industry.

See 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 for free.

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

We'd be pretty happy with returns on capital like Hotai MotorLtd. The company has consistently earned 22% for the last five years, and the capital employed within the business has risen 82% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

On a separate but related note, it's important to know that Hotai MotorLtd has a current liabilities to total assets ratio of 71%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

In summary, we're delighted to see that Hotai MotorLtd has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. However, over the last five years, the stock has only delivered a 4.3% return to shareholders who held over that period. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

If you'd like to know more about Hotai MotorLtd, we've spotted 3 warning signs, and 2 of them make us uncomfortable.

Hotai MotorLtd is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.