Here’s What’s Happening With Returns At TPC Mechatronics (KOSDAQ:048770)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, TPC Mechatronics (KOSDAQ:048770) looks quite promising in regards to its trends of return on capital.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for TPC Mechatronics, this is the formula:

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

0.054 = ₩2.3b ÷ (₩107b - ₩65b) (Based on the trailing twelve months to September 2020).

So, TPC Mechatronics has an ROCE of 5.4%. Even though it's in line with the industry average of 5.4%, it's still a low return by itself.

Check out our latest analysis for TPC Mechatronics

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 want to delve into the historical earnings, revenue and cash flow of TPC Mechatronics, check out these free graphs here.

How Are Returns Trending?

TPC Mechatronics has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 58% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

On a separate but related note, it's important to know that TPC Mechatronics has a current liabilities to total assets ratio of 61%, which we'd consider pretty high. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

To bring it all together, TPC Mechatronics has done well to increase the returns it's generating from its capital employed. And since the stock has fallen 18% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a final note, we found 3 warning signs for TPC Mechatronics (1 shouldn't be ignored) you should be aware of.

While TPC Mechatronics 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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