Investors Should Be Encouraged By Chicony Power Technology's (TWSE:6412) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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, the ROCE of Chicony Power Technology (TWSE:6412) looks great, so lets see what the trend can tell us.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Chicony Power Technology, this is the formula:

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

0.32 = NT$4.0b ÷ (NT$29b - NT$17b) (Based on the trailing twelve months to March 2024).

Thus, Chicony Power Technology has an ROCE of 32%. That's a fantastic return and not only that, it outpaces the average of 6.8% earned by companies in a similar industry.

Check out our latest analysis for Chicony Power Technology

Above you can see how the current ROCE for Chicony Power 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 Chicony Power Technology .

What Can We Tell From Chicony Power Technology's ROCE Trend?

Investors would be pleased with what's happening at Chicony Power Technology. Over the last five years, returns on capital employed have risen substantially to 32%. The amount of capital employed has increased too, by 58%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a separate but related note, it's important to know that Chicony Power Technology has a current liabilities to total assets ratio of 57%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Chicony Power Technology's ROCE

All in all, it's terrific to see that Chicony Power Technology is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 335% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing to note, we've identified 1 warning sign with Chicony Power Technology and understanding it should be part of your investment process.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.