Here's What's Concerning About Federal (TPE:2102)

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. On that note, looking into Federal (TPE:2102), we weren't too upbeat about how things were going.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Federal:

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

0.0044 = NT$53m ÷ (NT$14b - NT$2.1b) (Based on the trailing twelve months to September 2020).

So, Federal has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 4.7%.

View our latest analysis for Federal

Historical performance is a great place to start when researching a stock so above you can see the gauge for Federal's ROCE against it's prior returns. If you're interested in investigating Federal's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Federal Tell Us?

We are a bit worried about the trend of returns on capital at Federal. To be more specific, the ROCE was 5.3% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Federal becoming one if things continue as they have.

The Bottom Line

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors must expect better things on the horizon though because the stock has risen 39% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Federal does have some risks though, and we've spotted 1 warning sign for Federal that you might be interested in.

While Federal 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. 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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