Returns On Capital Signal Tricky Times Ahead For Advanced Energy Solution Holding (TWSE:6781)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Advanced Energy Solution Holding (TWSE:6781) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Advanced Energy Solution Holding is:

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

0.15 = NT$2.1b ÷ (NT$19b - NT$5.1b) (Based on the trailing twelve months to September 2024).

Therefore, Advanced Energy Solution Holding has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 8.2% it's much better.

View our latest analysis for Advanced Energy Solution Holding

In the above chart we have measured Advanced Energy Solution Holding's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Advanced Energy Solution Holding .

The Trend Of ROCE

In terms of Advanced Energy Solution Holding's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 25%, but since then they've fallen to 15%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Advanced Energy Solution Holding has done well to pay down its current liabilities to 26% of total assets. So we could link some of this to the decrease in ROCE. 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. 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.

What We Can Learn From Advanced Energy Solution Holding's ROCE

In summary, we're somewhat concerned by Advanced Energy Solution Holding's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 15% from where it was three years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Advanced Energy Solution Holding does have some risks though, and we've spotted 1 warning sign for Advanced Energy Solution Holding that you might be interested in.

While Advanced Energy Solution Holding 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.