If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we’ve noticed some promising trends at Unizyx Holding (TPE:3704) so let’s look a bit deeper.
What is 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. The formula for this calculation on Unizyx Holding is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.043 = NT$357m ÷ (NT$18b – NT$9.6b) (Based on the trailing twelve months to September 2020).
So, Unizyx Holding has an ROCE of 4.3%. In absolute terms, that’s a low return and it also under-performs the Communications industry average of 9.8%.
Above you can see how the current ROCE for Unizyx Holding compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
Unizyx Holding has broken into the black (profitability) and we’re sure it’s a sight for sore eyes. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 4.3%, which is always encouraging. On top of that, what’s interesting is that the amount of capital being employed has remained steady, so the business hasn’t needed to put any additional money to work to generate these higher returns. 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.
On a separate but related note, it’s important to know that Unizyx Holding has a current liabilities to total assets ratio of 53%, which we’d consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it’s not necessarily a bad thing, it can be beneficial if this ratio is lower.
To bring it all together, Unizyx Holding has done well to increase the returns it’s generating from its capital employed. And a remarkable 107% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.
If you’d like to know about the risks facing Unizyx Holding, we’ve discovered 2 warning signs that you should be aware of.
While Unizyx Holding 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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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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