The Returns On Capital At Roundtop Machinery Industries (TPE:1540) Don't Inspire Confidence

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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 indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after we looked into Roundtop Machinery Industries (TPE:1540), the trends above didn't look too great.

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 Roundtop Machinery Industries:

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

0.0029 = NT$4.0m ÷ (NT$1.5b - NT$185m) (Based on the trailing twelve months to September 2020).

Thus, Roundtop Machinery Industries has an ROCE of 0.3%. 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 Roundtop Machinery Industries

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Roundtop Machinery Industries' past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Roundtop Machinery Industries' historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 9.4% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Roundtop Machinery Industries to turn into a multi-bagger.

What We Can Learn From Roundtop Machinery Industries' ROCE

In summary, it's unfortunate that Roundtop Machinery Industries is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 33% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

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

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.

If you decide to trade Roundtop Machinery Industries, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.