Returns On Capital At Min Aik Precision Industrial (TPE:4545) Paint An Interesting Picture

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Min Aik Precision Industrial (TPE:4545) and its ROCE trend, we weren't exactly thrilled.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Min Aik Precision Industrial is:

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

0.03 = NT$65m ÷ (NT$3.2b - NT$968m) (Based on the trailing twelve months to September 2020).

So, Min Aik Precision Industrial has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Electrical industry average of 7.1%.

See our latest analysis for Min Aik Precision Industrial

Historical performance is a great place to start when researching a stock so above you can see the gauge for Min Aik Precision Industrial's ROCE against it's prior returns. If you'd like to look at how Min Aik Precision Industrial has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Min Aik Precision Industrial's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 42% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Min Aik Precision Industrial has done well to pay down its current liabilities to 31% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

In summary, Min Aik Precision Industrial is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 69% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Min Aik Precision Industrial (of which 2 make us uncomfortable!) that you should know about.

While Min Aik Precision Industrial isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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