Capital Allocation Trends At Taiwan Secom (TWSE:9917) Aren't Ideal

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. However, after briefly looking over the numbers, we don't think Taiwan Secom (TWSE:9917) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Taiwan Secom, this is the formula:

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

0.14 = NT$2.6b ÷ (NT$27b - NT$8.0b) (Based on the trailing twelve months to December 2023).

So, Taiwan Secom has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Commercial Services industry average of 7.0% it's much better.

Check out our latest analysis for Taiwan Secom

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

So How Is Taiwan Secom's ROCE Trending?

On the surface, the trend of ROCE at Taiwan Secom doesn't inspire confidence. Over the last five years, returns on capital have decreased to 14% from 19% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Taiwan Secom's ROCE

While returns have fallen for Taiwan Secom in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Furthermore the stock has climbed 91% over the last five years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

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

While Taiwan Secom 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.