TES Touch Embedded Solutions (Xiamen) (SZSE:003019) Might Be Having Difficulty Using Its Capital Effectively

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at TES Touch Embedded Solutions (Xiamen) (SZSE:003019) 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 who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on TES Touch Embedded Solutions (Xiamen) is:

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

0.14 = CN¥249m ÷ (CN¥2.5b - CN¥822m) (Based on the trailing twelve months to September 2024).

Thus, TES Touch Embedded Solutions (Xiamen) has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 5.5% generated by the Electronic industry.

View our latest analysis for TES Touch Embedded Solutions (Xiamen)

In the above chart we have measured TES Touch Embedded Solutions (Xiamen)'s prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering TES Touch Embedded Solutions (Xiamen) for free.

How Are Returns Trending?

When we looked at the ROCE trend at TES Touch Embedded Solutions (Xiamen), we didn't gain much confidence. Around five years ago the returns on capital were 34%, but since then they've fallen to 14%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for TES Touch Embedded Solutions (Xiamen). These trends are starting to be recognized by investors since the stock has delivered a 17% gain to shareholders who've held over the last three years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you want to continue researching TES Touch Embedded Solutions (Xiamen), you might be interested to know about the 1 warning sign that our analysis has discovered.

While TES Touch Embedded Solutions (Xiamen) may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.