Waffer Technology (TWSE:6235) Shareholders Will Want The ROCE Trajectory To Continue

There are a few key trends to look for if we want to identify the next 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Waffer Technology (TWSE:6235) so let's look a bit deeper.

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. Analysts use this formula to calculate it for Waffer Technology:

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

0.18 = NT$909m ÷ (NT$8.3b - NT$3.3b) (Based on the trailing twelve months to December 2023).

Thus, Waffer Technology has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 8.2% generated by the Machinery industry.

See our latest analysis for Waffer Technology

Above you can see how the current ROCE for Waffer Technology 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 Waffer Technology .

What The Trend Of ROCE Can Tell Us

Investors would be pleased with what's happening at Waffer Technology. Over the last five years, returns on capital employed have risen substantially to 18%. The amount of capital employed has increased too, by 106%. So we're very much inspired by what we're seeing at Waffer Technology thanks to its ability to profitably reinvest capital.

The Bottom Line On Waffer Technology's ROCE

All in all, it's terrific to see that Waffer Technology is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 612% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Waffer Technology can keep these trends up, it could have a bright future ahead.

Waffer Technology does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

While Waffer Technology may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.