Here’s why Taiwan Name Plate Co., Ltd.’s (GTSM:6593) Returns On Capital Matters So Much

Today we'll look at Taiwan Name Plate Co., Ltd. (GTSM:6593) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.

So, How Do We Calculate ROCE?

The formula for calculating the return on capital employed is:

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

Or for Taiwan Name Plate:

0.013 = NT$8.0m ÷ (NT$731m - NT$124m) (Based on the trailing twelve months to September 2019.)

Therefore, Taiwan Name Plate has an ROCE of 1.3%.

Check out our latest analysis for Taiwan Name Plate

Does Taiwan Name Plate Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, Taiwan Name Plate's ROCE appears to be significantly below the 7.0% average in the Commercial Services industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Taiwan Name Plate compares to its industry, its ROCE in absolute terms is low; especially compared to the ~0.7% available in government bonds. Readers may wish to look for more rewarding investments.

Taiwan Name Plate's current ROCE of 1.3% is lower than its ROCE in the past, which was 10%, 3 years ago. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Taiwan Name Plate's past growth compares to other companies.

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. You can check if Taiwan Name Plate has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

What Are Current Liabilities, And How Do They Affect Taiwan Name Plate's ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Taiwan Name Plate has total assets of NT$731m and current liabilities of NT$124m. As a result, its current liabilities are equal to approximately 17% of its total assets. This is a modest level of current liabilities, which will have a limited impact on the ROCE.

Our Take On Taiwan Name Plate's ROCE

While that is good to see, Taiwan Name Plate has a low ROCE and does not look attractive in this analysis. You might be able to find a better investment than Taiwan Name Plate. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.