Is AHOKU Electronic (TPE:3002) Headed For Trouble?

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at AHOKU Electronic (TPE:3002), so let's see why.

What is 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. Analysts use this formula to calculate it for AHOKU Electronic:

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

0.0059 = NT$10m ÷ (NT$1.9b - NT$190m) (Based on the trailing twelve months to September 2020).

Thus, AHOKU Electronic has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Electrical industry average of 7.1%.

View our latest analysis for AHOKU Electronic

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

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at AHOKU Electronic. About five years ago, returns on capital were 2.2%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect AHOKU Electronic to turn into a multi-bagger.

The Key Takeaway

In summary, it's unfortunate that AHOKU Electronic is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 24% 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.

One final note, you should learn about the 5 warning signs we've spotted with AHOKU Electronic (including 2 which make us uncomfortable) .

While AHOKU 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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