Horng Tong Enterprise (GTSM:5271) Is Doing The Right Things To Multiply Its Share Price

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Horng Tong Enterprise (GTSM:5271) looks quite promising in regards to its trends of return on capital.

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. Analysts use this formula to calculate it for Horng Tong Enterprise:

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

0.06 = NT$30m ÷ (NT$1.0b - NT$535m) (Based on the trailing twelve months to June 2020).

Therefore, Horng Tong Enterprise has an ROCE of 6.0%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 11%.

See our latest analysis for Horng Tong Enterprise

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

So How Is Horng Tong Enterprise's ROCE Trending?

We're delighted to see that Horng Tong Enterprise is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 6.0%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

Another thing to note, Horng Tong Enterprise has a high ratio of current liabilities to total assets of 52%. 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

To sum it up, Horng Tong Enterprise is collecting higher returns from the same amount of capital, and that's impressive. Considering the stock has delivered 8.9% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Like most companies, Horng Tong Enterprise does come with some risks, and we've found 6 warning signs that you should be aware of.

While Horng Tong Enterprise 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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