Stock Analysis

Patec Precision Industry (TPE:2236) Is Reinvesting At Lower Rates Of Return

TWSE:2236
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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Patec Precision Industry (TPE:2236) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. To calculate this metric for Patec Precision Industry, this is the formula:

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

0.033 = NT$55m ÷ (NT$2.3b - NT$591m) (Based on the trailing twelve months to December 2020).

Thus, Patec Precision Industry has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 4.8%.

See our latest analysis for Patec Precision Industry

roce
TSEC:2236 Return on Capital Employed April 1st 2021

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'd like to look at how Patec Precision Industry has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Patec Precision Industry, we didn't gain much confidence. Around five years ago the returns on capital were 8.2%, but since then they've fallen to 3.3%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

What We Can Learn From Patec Precision Industry's ROCE

In summary, we're somewhat concerned by Patec Precision Industry's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 41% 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 2 warning signs, and 1 of them is a bit concerning.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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