We're Watching These Trends At Symtek Automation Asia (TPE:6438)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Having said that, from a first glance at Symtek Automation Asia (TPE:6438) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Symtek Automation Asia:

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

0.11 = NT$284m ÷ (NT$4.3b - NT$1.7b) (Based on the trailing twelve months to September 2020).

Thus, Symtek Automation Asia has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 9.3% generated by the Machinery industry.

Check out our latest analysis for Symtek Automation Asia

Historical performance is a great place to start when researching a stock so above you can see the gauge for Symtek Automation Asia's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Symtek Automation Asia, check out these free graphs here.

How Are Returns Trending?

Unfortunately, the trend isn't great with ROCE falling from 32% five years ago, while capital employed has grown 152%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. Symtek Automation Asia probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a side note, Symtek Automation Asia has done well to pay down its current liabilities to 41% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Symtek Automation Asia have fallen, meanwhile the business is employing more capital than it was five years ago. Since the stock has skyrocketed 158% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Symtek Automation Asia (including 1 which is a bit concerning) .

While Symtek Automation Asia 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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