Our Take On The Returns On Capital At Wah Lee Industrial (TPE:3010)

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Wah Lee Industrial (TPE:3010) and its ROCE trend, we weren't exactly thrilled.

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

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. The formula for this calculation on Wah Lee Industrial is:

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

0.098 = NT$2.0b ÷ (NT$36b - NT$16b) (Based on the trailing twelve months to September 2020).

So, Wah Lee Industrial has an ROCE of 9.8%. On its own, that's a low figure but it's around the 11% average generated by the Electronic industry.

View our latest analysis for Wah Lee Industrial

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

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at Wah Lee Industrial. Over the past five years, ROCE has remained relatively flat at around 9.8% and the business has deployed 33% more capital into its operations. 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.

Another thing to note, Wah Lee Industrial has a high ratio of current liabilities to total assets of 44%. 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.

In Conclusion...

As we've seen above, Wah Lee Industrial's returns on capital haven't increased but it is reinvesting in the business. Yet to long term shareholders the stock has gifted them an incredible 135% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a separate note, we've found 2 warning signs for Wah Lee Industrial you'll probably want to 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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