If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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 Lien Chang Electronic Enterprise (TPE:2431) 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. Analysts use this formula to calculate it for Lien Chang Electronic Enterprise:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.022 = NT$31m ÷ (NT$2.2b – NT$829m) (Based on the trailing twelve months to September 2020).
Thus, Lien Chang Electronic Enterprise has an ROCE of 2.2%. In absolute terms, that’s a low return and it also under-performs the Electronic industry average of 11%.
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’d like to look at how Lien Chang Electronic Enterprise has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
Lien Chang Electronic Enterprise has broken into the black (profitability) and we’re sure it’s a sight for sore eyes. The company now earns 2.2% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Lien Chang Electronic Enterprise 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. So if you’re looking for high growth, you’ll want to see a business’s capital employed also increasing.
Our Take On Lien Chang Electronic Enterprise’s ROCE
To bring it all together, Lien Chang Electronic Enterprise has done well to increase the returns it’s generating from its capital employed. Astute investors may have an opportunity here because the stock has declined 23% in the last five years. That being the case, research into the company’s current valuation metrics and future prospects seems fitting.
One final note, you should learn about the 2 warning signs we’ve spotted with Lien Chang Electronic Enterprise (including 1 which is potentially serious) .
While Lien Chang Electronic Enterprise 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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