Returns Are Gaining Momentum At UMC Electronics (TSE:6615)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. So on that note, UMC Electronics (TSE:6615) looks quite promising in regards to its trends of return on capital.

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 UMC Electronics, this is the formula:

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

0.061 = JP¥2.0b ÷ (JP¥79b - JP¥46b) (Based on the trailing twelve months to March 2024).

So, UMC Electronics has an ROCE of 6.1%. Ultimately, that's a low return and it under-performs the Electronic industry average of 9.2%.

See our latest analysis for UMC Electronics

Historical performance is a great place to start when researching a stock so above you can see the gauge for UMC Electronics' ROCE against it's prior returns. If you'd like to look at how UMC Electronics has performed in the past in other metrics, you can view this free graph of UMC Electronics' past earnings, revenue and cash flow.

The Trend Of ROCE

UMC Electronics has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 6.1% which is a sight for sore eyes. In addition to that, UMC Electronics is employing 23% more capital than previously which is expected of a company that's 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.

On a side note, UMC Electronics' current liabilities are still rather high at 58% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

To the delight of most shareholders, UMC Electronics has now broken into profitability. And since the stock has fallen 62% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you'd like to know more about UMC Electronics, we've spotted 4 warning signs, and 2 of them are concerning.

While UMC Electronics 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. 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.

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