Here’s What’s Happening With Returns At Chieftek Precision (TPE:1597)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Chieftek Precision (TPE:1597) looks quite promising in regards to its trends of return on capital.

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

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. To calculate this metric for Chieftek Precision, this is the formula:

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

0.091 = NT$250m ÷ (NT$3.5b - NT$800m) (Based on the trailing twelve months to September 2020).

Therefore, Chieftek Precision has an ROCE of 9.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.3%.

Check out our latest analysis for Chieftek Precision

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

The Trend Of ROCE

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 9.1%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 48%. So we're very much inspired by what we're seeing at Chieftek Precision thanks to its ability to profitably reinvest capital.

Our Take On Chieftek Precision's ROCE

All in all, it's terrific to see that Chieftek Precision is reaping the rewards from prior investments and is growing its capital base. And a remarkable 506% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you'd like to know about the risks facing Chieftek Precision, we've discovered 2 warning signs that you should be aware of.

While Chieftek Precision may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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