What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Apex Science & Engineering (TPE:3052) so let's look a bit deeper.
Return On Capital Employed (ROCE): What is it?
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. The formula for this calculation on Apex Science & Engineering is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = NT$444m ÷ (NT$7.5b - NT$4.0b) (Based on the trailing twelve months to June 2020).
So, Apex Science & Engineering has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 7.5% generated by the Construction industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Apex Science & Engineering's ROCE against it's prior returns. If you'd like to look at how Apex Science & Engineering has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From Apex Science & Engineering's ROCE Trend?
Apex Science & Engineering is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 165% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.Another thing to note, Apex Science & Engineering has a high ratio of current liabilities to total assets of 53%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
Our Take On Apex Science & Engineering's ROCE
To sum it up, Apex Science & Engineering is collecting higher returns from the same amount of capital, and that's impressive. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 33% to shareholders. So with that in mind, we think the stock deserves further research.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Apex Science & Engineering (of which 1 shouldn't be ignored!) that you should know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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