A Close Look At YaHorng Electronic Co., Ltd.’s (TPE:6201) 11% ROCE

Today we are going to look at YaHorng Electronic Co., Ltd. (TPE:6201) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.

So, How Do We Calculate ROCE?

The formula for calculating the return on capital employed is:

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

Or for YaHorng Electronic:

0.11 = NT$277m ÷ (NT$3.2b - NT$679m) (Based on the trailing twelve months to December 2019.)

So, YaHorng Electronic has an ROCE of 11%.

View our latest analysis for YaHorng Electronic

Does YaHorng Electronic Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. YaHorng Electronic's ROCE appears to be substantially greater than the 9.1% average in the Consumer Durables industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Independently of how YaHorng Electronic compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

The image below shows how YaHorng Electronic's ROCE compares to its industry, and you can click it to see more detail on its past growth.

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. If YaHorng Electronic is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

How YaHorng Electronic's Current Liabilities Impact Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.

YaHorng Electronic has current liabilities of NT$679m and total assets of NT$3.2b. As a result, its current liabilities are equal to approximately 21% of its total assets. Low current liabilities are not boosting the ROCE too much.

The Bottom Line On YaHorng Electronic's ROCE

This is good to see, and with a sound ROCE, YaHorng Electronic could be worth a closer look. There might be better investments than YaHorng Electronic out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

I will like YaHorng Electronic better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

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