Returns On Capital At Weikeng Industrial (TPE:3033) Have Stalled

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over Weikeng Industrial's (TPE:3033) trend of ROCE, we liked what we saw.

What is 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. To calculate this metric for Weikeng Industrial, this is the formula:

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

0.13 = NT$852m ÷ (NT$23b - NT$16b) (Based on the trailing twelve months to September 2020).

So, Weikeng Industrial has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 11% generated by the Electronic industry.

See our latest analysis for Weikeng Industrial

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

What Can We Tell From Weikeng Industrial's ROCE Trend?

While the returns on capital are good, they haven't moved much. The company has employed 29% more capital in the last five years, and the returns on that capital have remained stable at 13%. Since 13% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a separate but related note, it's important to know that Weikeng Industrial has a current liabilities to total assets ratio of 72%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Weikeng Industrial's ROCE

To sum it up, Weikeng Industrial has simply been reinvesting capital steadily, at those decent rates of return. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

On a final note, we've found 2 warning signs for Weikeng Industrial that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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