Transart Graphics (TPE:8481) Will Be Hoping To Turn Its Returns On Capital Around

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Transart Graphics (TPE:8481) and its ROCE trend, we weren't exactly thrilled.

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

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 Transart Graphics, this is the formula:

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

0.15 = NT$285m ÷ (NT$2.5b - NT$597m) (Based on the trailing twelve months to December 2020).

Therefore, Transart Graphics has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 5.4% generated by the Commercial Services industry.

Check out our latest analysis for Transart Graphics

Historical performance is a great place to start when researching a stock so above you can see the gauge for Transart Graphics' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Transart Graphics, check out these free graphs here.

What Can We Tell From Transart Graphics' ROCE Trend?

On the surface, the trend of ROCE at Transart Graphics doesn't inspire confidence. Over the last five years, returns on capital have decreased to 15% from 27% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Transart Graphics. And the stock has followed suit returning a meaningful 76% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Like most companies, Transart Graphics does come with some risks, and we've found 1 warning sign that you should be aware of.

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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