We're Watching These Trends At 104 (TPE:3130)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. However, after investigating 104 (TPE:3130), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for 104:

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

0.20 = NT$283m ÷ (NT$2.5b - NT$1.0b) (Based on the trailing twelve months to September 2020).

Thus, 104 has an ROCE of 20%. On its own, that's a standard return, however it's much better than the 14% generated by the Professional Services industry.

See our latest analysis for 104

Historical performance is a great place to start when researching a stock so above you can see the gauge for 104's ROCE against it's prior returns. If you're interested in investigating 104's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For 104 Tell Us?

Over the past five years, 104's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if 104 doesn't end up being a multi-bagger in a few years time.

Another thing to note, 104 has a high ratio of current liabilities to total assets of 42%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

We can conclude that in regards to 104's returns on capital employed and the trends, there isn't much change to report on. Since the stock has gained an impressive 59% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One final note, you should learn about the 2 warning signs we've spotted with 104 (including 1 which is a bit concerning) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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. 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.
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