What Can The Trends At Bin Chuan Enterprise (GTSM:1569) Tell Us About Their Returns?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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, we've noticed some promising trends at Bin Chuan Enterprise (GTSM:1569) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Bin Chuan Enterprise:

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

0.14 = NT$587m ÷ (NT$7.2b - NT$3.0b) (Based on the trailing twelve months to September 2020).

So, Bin Chuan Enterprise has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 12% generated by the Tech industry.

View our latest analysis for Bin Chuan Enterprise

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

The Trend Of ROCE

The fact that Bin Chuan Enterprise is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 14% on its capital. And unsurprisingly, like most companies trying to break into the black, Bin Chuan Enterprise is utilizing 35% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a separate but related note, it's important to know that Bin Chuan Enterprise has a current liabilities to total assets ratio of 42%, 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

Long story short, we're delighted to see that Bin Chuan Enterprise's reinvestment activities have paid off and the company is now profitable. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you want to continue researching Bin Chuan Enterprise, you might be interested to know about the 1 warning sign that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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