The Return Trends At Twinhead International (TPE:2364) Look Promising

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Twinhead International (TPE:2364) looks quite promising in regards to its trends of return on capital.

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. Analysts use this formula to calculate it for Twinhead International:

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

0.0073 = NT$2.2m ÷ (NT$1.2b - NT$864m) (Based on the trailing twelve months to December 2020).

Thus, Twinhead International has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Tech industry average of 11%.

View our latest analysis for Twinhead International

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Twinhead International has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Twinhead International's ROCE Trending?

We're delighted to see that Twinhead International is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 0.7% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 46% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. This could potentially mean that the company is selling some of its assets.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 74% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

Our Take On Twinhead International's ROCE

In a nutshell, we're pleased to see that Twinhead International has been able to generate higher returns from less capital. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. With that in mind, we believe the promising trends warrant this stock for further investigation.

Twinhead International does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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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