The Returns At Taiwan Pelican Express (TPE:2642) Provide Us With Signs Of What's To Come

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'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. In light of that, when we looked at Taiwan Pelican Express (TPE:2642) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. To calculate this metric for Taiwan Pelican Express, this is the formula:

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

0.08 = NT$231m ÷ (NT$3.8b - NT$900m) (Based on the trailing twelve months to September 2020).

Therefore, Taiwan Pelican Express has an ROCE of 8.0%. Ultimately, that's a low return and it under-performs the Logistics industry average of 11%.

Check out our latest analysis for Taiwan Pelican Express

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Taiwan Pelican Express, check out these free graphs here.

What Does the ROCE Trend For Taiwan Pelican Express Tell Us?

In terms of Taiwan Pelican Express' historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 8.0% and the business has deployed 77% 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.

What We Can Learn From Taiwan Pelican Express' ROCE

In summary, Taiwan Pelican Express has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has gained an impressive 41% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Taiwan Pelican Express does have some risks though, and we've spotted 1 warning sign for Taiwan Pelican Express that you might be interested in.

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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