Should We Be Excited About The Trends Of Returns At Huxen (TPE:2433)?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. In light of that, when we looked at Huxen (TPE:2433) and its ROCE trend, we weren't exactly thrilled.

Understanding 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 Huxen:

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

0.088 = NT$501m ÷ (NT$7.8b - NT$2.1b) (Based on the trailing twelve months to September 2020).

So, Huxen has an ROCE of 8.8%. In absolute terms, that's a low return but it's around the Electronic industry average of 10%.

View our latest analysis for Huxen

Historical performance is a great place to start when researching a stock so above you can see the gauge for Huxen's ROCE against it's prior returns. If you're interested in investigating Huxen's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Huxen Tell Us?

In terms of Huxen's historical ROCE trend, it doesn't exactly demand attention. The company has employed 22% more capital in the last five years, and the returns on that capital have remained stable at 8.8%. 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.

Our Take On Huxen's ROCE

In conclusion, Huxen has been investing more capital into the business, but returns on that capital haven't increased. Although the market must be expecting these trends to improve because the stock has gained 67% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Huxen does have some risks though, and we've spotted 2 warning signs for Huxen that you might be interested in.

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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