Be Wary Of Excel Cell Electronic (TPE:2483) And Its Returns On Capital

When researching a stock for investment, what can tell us that the company is in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don't look too good at Excel Cell Electronic (TPE:2483), so let's see why.

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 Excel Cell Electronic:

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

0.017 = NT$47m ÷ (NT$3.8b - NT$964m) (Based on the trailing twelve months to September 2020).

Thus, Excel Cell Electronic has an ROCE of 1.7%. 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 Excel Cell Electronic

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

So How Is Excel Cell Electronic's ROCE Trending?

In terms of Excel Cell Electronic's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 4.2%, 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. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Excel Cell Electronic becoming one if things continue as they have.

On a side note, Excel Cell Electronic's current liabilities have increased over the last five years to 25% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Bottom Line

In summary, it's unfortunate that Excel Cell Electronic is generating lower returns from the same amount of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 45% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a final note, we found 5 warning signs for Excel Cell Electronic (2 are potentially serious) you should be aware of.

While Excel Cell Electronic 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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