Returns On Capital Signal Tricky Times Ahead For Taiwan Secom (TWSE:9917)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. 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)

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. Analysts use this formula to calculate it for Taiwan Secom:

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

0.15 = NT$2.7b ÷ (NT$28b - NT$10b) (Based on the trailing twelve months to June 2024).

Thus, Taiwan Secom has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Commercial Services industry average of 8.1% 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.

What Does the ROCE Trend For Taiwan Secom Tell Us?

When we looked at the ROCE trend at Taiwan Secom, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 15% from 20% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Taiwan Secom's ROCE

To conclude, we've found that Taiwan Secom is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 114% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to continue researching Taiwan Secom, you might be interested to know about the 1 warning sign that our analysis has discovered.

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. 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.