Stock Analysis

Is Patec Precision Industry (TPE:2236) Set To Make A Turnaround?

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When researching a stock for investment, what can tell us that the company is in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Patec Precision Industry (TPE:2236), the trends above didn't look too great.

What is 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 Patec Precision Industry is:

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

0.013 = NT$21m ÷ (NT$2.2b - NT$641m) (Based on the trailing twelve months to September 2020).

Thus, Patec Precision Industry has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 4.7%.

View our latest analysis for Patec Precision Industry

TSEC:2236 Return on Capital Employed December 30th 2020

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

How Are Returns Trending?

In terms of Patec Precision Industry's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 9.7% 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. If these trends continue, we wouldn't expect Patec Precision Industry to turn into a multi-bagger.

The Bottom Line On Patec Precision Industry's ROCE

In summary, it's unfortunate that Patec Precision Industry is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 12% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know more about Patec Precision Industry, we've spotted 3 warning signs, and 1 of them makes us a bit uncomfortable.

While Patec Precision Industry 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. 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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