National Aerospace Fasteners' (TPE:3004) Returns On Capital Not Reflecting Well On The Business

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at National Aerospace Fasteners (TPE:3004) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for National Aerospace Fasteners:

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

0.0087 = NT$34m ÷ (NT$4.4b - NT$529m) (Based on the trailing twelve months to December 2020).

Thus, National Aerospace Fasteners has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 9.2%.

Check out our latest analysis for National Aerospace Fasteners

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 National Aerospace Fasteners has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is National Aerospace Fasteners' ROCE Trending?

When we looked at the ROCE trend at National Aerospace Fasteners, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 0.9% from 16% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, National Aerospace Fasteners has done well to pay down its current liabilities to 12% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From National Aerospace Fasteners' ROCE

In summary, we're somewhat concerned by National Aerospace Fasteners' diminishing returns on increasing amounts of capital. Despite the concerning underlying trends, the stock has actually gained 13% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

National Aerospace Fasteners does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those can't be ignored...

While National Aerospace Fasteners 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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