Cheng Uei Precision Industry (TWSE:2392) Has Some Way To Go To Become A Multi-Bagger

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Cheng Uei Precision Industry (TWSE:2392) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Cheng Uei Precision Industry is:

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

0.043 = NT$3.7b ÷ (NT$128b - NT$43b) (Based on the trailing twelve months to September 2024).

Therefore, Cheng Uei Precision Industry has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 7.4%.

View our latest analysis for Cheng Uei Precision Industry

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

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at Cheng Uei Precision Industry. The company has employed 71% more capital in the last five years, and the returns on that capital have remained stable at 4.3%. 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 Cheng Uei Precision Industry's ROCE

In summary, Cheng Uei Precision Industry has simply been reinvesting capital and generating the same low rate of return as before. Yet to long term shareholders the stock has gifted them an incredible 113% 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.

If you'd like to know more about Cheng Uei Precision Industry, we've spotted 4 warning signs, and 2 of them are significant.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.