Here’s What’s Happening With Returns At Ta-Yuan Cogeneration (GTSM:8931)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Ta-Yuan Cogeneration (GTSM:8931) so let's look a bit deeper.

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

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 Ta-Yuan Cogeneration, this is the formula:

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

0.11 = NT$259m ÷ (NT$4.3b - NT$2.0b) (Based on the trailing twelve months to September 2020).

Thus, Ta-Yuan Cogeneration has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 7.2% generated by the Renewable Energy industry.

View our latest analysis for Ta-Yuan Cogeneration

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're interested in investigating Ta-Yuan Cogeneration's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Ta-Yuan Cogeneration's ROCE Trending?

Ta-Yuan Cogeneration is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 77% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 47% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Bottom Line On Ta-Yuan Cogeneration's ROCE

As discussed above, Ta-Yuan Cogeneration appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a solid 90% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. 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.

One more thing: We've identified 2 warning signs with Ta-Yuan Cogeneration (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.

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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