Should You Be Impressed By TECO Electric & Machinery's (TPE:1504) Returns on Capital?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. However, after investigating TECO Electric & Machinery (TPE:1504), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

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 TECO Electric & Machinery, this is the formula:

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

0.038 = NT$3.3b ÷ (NT$106b - NT$19b) (Based on the trailing twelve months to September 2020).

Thus, TECO Electric & Machinery has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 7.1%.

View our latest analysis for TECO Electric & Machinery

In the above chart we have measured TECO Electric & Machinery's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for TECO Electric & Machinery.

What Can We Tell From TECO Electric & Machinery's ROCE Trend?

We weren't thrilled with the trend because TECO Electric & Machinery's ROCE has reduced by 36% over the last five years, while the business employed 42% more capital. Usually this isn't ideal, but given TECO Electric & Machinery conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with TECO Electric & Machinery's earnings and if they change as a result from the capital raise.

In Conclusion...

To conclude, we've found that TECO Electric & Machinery is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 31% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Like most companies, TECO Electric & Machinery does come with some risks, and we've found 2 warning signs that you should be aware of.

While TECO Electric & Machinery 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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