Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. So when we looked at the ROCE trend of Jia Wei Lifestyle (TPE:3557) we really liked what we saw.
Return On Capital Employed (ROCE): What is it?
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 Jia Wei Lifestyle is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.33 = NT$782m ÷ (NT$4.5b – NT$2.1b) (Based on the trailing twelve months to December 2020).
Thus, Jia Wei Lifestyle has an ROCE of 33%. That’s a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Jia Wei Lifestyle’s ROCE against it’s prior returns. If you’d like to look at how Jia Wei Lifestyle 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
We’re delighted to see that Jia Wei Lifestyle is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it’s earning 33% which is a sight for sore eyes. Not only that, but the company is utilizing 165% more capital than before, but that’s to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
For the record though, there was a noticeable increase in the company’s current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 47% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that’s pretty high.
The Key Takeaway
Overall, Jia Wei Lifestyle gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Since the stock has returned a staggering 748% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Jia Wei Lifestyle does have some risks though, and we’ve spotted 2 warning signs for Jia Wei Lifestyle that you might be interested in.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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