Here’s What’s Happening With Returns At Nishoku Technology (TPE:3679)

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Nishoku Technology (TPE:3679) 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. Analysts use this formula to calculate it for Nishoku Technology:

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

0.14 = NT$835m ÷ (NT$8.1b - NT$2.1b) (Based on the trailing twelve months to September 2020).

So, Nishoku Technology has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 9.3% it's much better.

View our latest analysis for Nishoku Technology

Above you can see how the current ROCE for Nishoku Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Nishoku Technology here for free.

What Does the ROCE Trend For Nishoku Technology Tell Us?

Nishoku Technology 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 148% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

Our Take On Nishoku Technology's ROCE

To sum it up, Nishoku Technology is collecting higher returns from the same amount of capital, and that's impressive. And a remarkable 199% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Nishoku Technology does have some risks, we noticed 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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