Is Altek (TPE:3059) Set To Make A Turnaround?

What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after glancing at the trends within Altek (TPE:3059), we weren't too hopeful.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Altek:

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

0.0013 = NT$13m ÷ (NT$14b - NT$4.6b) (Based on the trailing twelve months to September 2020).

Thus, Altek has an ROCE of 0.1%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 10.0%.

View our latest analysis for Altek

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

What The Trend Of ROCE Can Tell Us

In terms of Altek's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 2.5% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Altek to turn into a multi-bagger.

What We Can Learn From Altek's ROCE

In summary, it's unfortunate that Altek is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 2.7% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Altek does have some risks though, and we've spotted 1 warning sign for Altek that you might be interested in.

While Altek 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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