Returns On Capital - An Important Metric For Copartner Technology (TPE:3550)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So on that note, Copartner Technology (TPE:3550) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What is it?

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

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

0.05 = NT$119m ÷ (NT$3.9b - NT$1.5b) (Based on the trailing twelve months to September 2020).

So, Copartner Technology has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 7.1%.

Check out our latest analysis for Copartner 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 Copartner Technology, check out these free graphs here.

The Trend Of ROCE

Copartner Technology's ROCE growth is quite impressive. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 57% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 39% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

What We Can Learn From Copartner Technology's ROCE

In summary, we're delighted to see that Copartner Technology has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a solid 75% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Copartner Technology does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those make us uncomfortable...

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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