Will The ROCE Trend At FSP Technology (TPE:3015) Continue?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. With that in mind, we've noticed some promising trends at FSP Technology (TPE:3015) so let's look a bit deeper.

Understanding 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. To calculate this metric for FSP Technology, this is the formula:

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

0.036 = NT$404m ÷ (NT$18b - NT$6.5b) (Based on the trailing twelve months to September 2020).

Thus, FSP Technology has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Electrical industry average of 7.1%.

Check out our latest analysis for FSP Technology

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 want to delve into the historical earnings, revenue and cash flow of FSP Technology, check out these free graphs here.

So How Is FSP Technology's ROCE Trending?

The fact that FSP Technology is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 3.6% on its capital. Not only that, but the company is utilizing 31% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In Conclusion...

Overall, FSP Technology gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And a remarkable 162% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you'd like to know more about FSP Technology, we've spotted 3 warning signs, and 1 of them is concerning.

While FSP Technology 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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