If you’re looking for a multi-bagger, there’s a few things to 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. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Nankang Rubber TireLtd (TPE:2101) we aren’t jumping out of our chairs at how returns are trending, but let’s have a deeper look.
Understanding Return On Capital Employed (ROCE)
For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Nankang Rubber TireLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.045 = NT$750m ÷ (NT$31b – NT$14b) (Based on the trailing twelve months to September 2020).
Thus, Nankang Rubber TireLtd has an ROCE of 4.5%. Even though it’s in line with the industry average of 4.7%, it’s still a low return by itself.
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 Nankang Rubber TireLtd’s past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Nankang Rubber TireLtd Tell Us?
There hasn’t been much to report for Nankang Rubber TireLtd’s returns and its level of capital employed because both metrics have been steady for the past five years. It’s not uncommon to see this when looking at a mature and stable business that isn’t re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at Nankang Rubber TireLtd in terms of ROCE and additional investments being made, we wouldn’t hold our breath on it being a multi-bagger.
On another note, while the change in ROCE trend might not scream for attention, it’s interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn’t increased to 46% of total assets, this reported ROCE would probably be less than4.5% because total capital employed would be higher.The 4.5% ROCE could be even lower if current liabilities weren’t 46% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn’t ideal because it means the company’s suppliers (or short-term creditors) are effectively funding a large portion of the business.
Our Take On Nankang Rubber TireLtd’s ROCE
In a nutshell, Nankang Rubber TireLtd has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has gained an impressive 59% over the last five years, investors must think there’s better things to come. However, unless these underlying trends turn more positive, we wouldn’t get our hopes up too high.
On a final note, we found 3 warning signs for Nankang Rubber TireLtd (2 are concerning) you should be aware of.
While Nankang Rubber TireLtd 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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