Returns On Capital At Awea mechantronicltd (TPE:1530) Paint A Concerning Picture

What underlying fundamental trends can indicate that a company might be in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. Having said that, after a brief look, Awea mechantronicltd (TPE:1530) we aren't filled with optimism, but let's investigate further.

Understanding 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. The formula for this calculation on Awea mechantronicltd is:

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

0.0068 = NT$23m ÷ (NT$6.3b - NT$2.9b) (Based on the trailing twelve months to September 2020).

Therefore, Awea mechantronicltd has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 9.3%.

View our latest analysis for Awea mechantronicltd

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

The Trend Of ROCE

In terms of Awea mechantronicltd's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 7.7%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Awea mechantronicltd becoming one if things continue as they have.

On a separate but related note, it's important to know that Awea mechantronicltd has a current liabilities to total assets ratio of 46%, 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 Bottom Line On Awea mechantronicltd's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. In spite of that, the stock has delivered a 26% return to shareholders who held over 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.

Awea mechantronicltd does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those can't be ignored...

While Awea mechantronicltd 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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