Some Investors May Be Worried About Sixxon Tech's (TWSE:4569) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Sixxon Tech (TWSE:4569) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Sixxon Tech is:

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

0.04 = NT$117m ÷ (NT$3.1b - NT$231m) (Based on the trailing twelve months to September 2024).

Therefore, Sixxon Tech has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Machinery industry average of 8.8%.

See our latest analysis for Sixxon Tech

Above you can see how the current ROCE for Sixxon Tech compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Sixxon Tech .

What Can We Tell From Sixxon Tech's ROCE Trend?

On the surface, the trend of ROCE at Sixxon Tech doesn't inspire confidence. To be more specific, ROCE has fallen from 9.8% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Sixxon Tech has decreased its current liabilities to 7.4% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Sixxon Tech's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Sixxon Tech is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 124% to shareholders in the last year. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Sixxon Tech (of which 1 can't be ignored!) that you should know about.

While Sixxon Tech 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.