Is There More Growth In Store For Unizyx Holding's (TPE:3704) Returns On Capital?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. With that in mind, we've noticed some promising trends at Unizyx Holding (TPE:3704) so let's look a bit deeper.

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. To calculate this metric for Unizyx Holding, this is the formula:

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

0.043 = NT$357m ÷ (NT$18b - NT$9.6b) (Based on the trailing twelve months to September 2020).

So, Unizyx Holding has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 9.8%.

See our latest analysis for Unizyx Holding

Above you can see how the current ROCE for Unizyx Holding compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Unizyx Holding's ROCE Trend?

Shareholders will be relieved that Unizyx Holding has broken into profitability. The company now earns 4.3% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Unizyx Holding has remained flat over the period. 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. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

On a separate but related note, it's important to know that Unizyx Holding has a current liabilities to total assets ratio of 53%, 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

In summary, we're delighted to see that Unizyx Holding has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

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

While Unizyx Holding isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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