Ability Enterprise's (TWSE:2374) Returns On Capital Are Heading Higher

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Ability Enterprise (TWSE:2374) so let's look a bit deeper.

What Is 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 Ability Enterprise:

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

0.033 = NT$229m ÷ (NT$9.2b - NT$2.2b) (Based on the trailing twelve months to March 2024).

Thus, Ability Enterprise has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 7.5%.

See our latest analysis for Ability Enterprise

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Ability Enterprise's past further, check out this free graph covering Ability Enterprise's past earnings, revenue and cash flow.

The Trend Of ROCE

Shareholders will be relieved that Ability Enterprise has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 3.3%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

The Key Takeaway

In summary, we're delighted to see that Ability Enterprise has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 325% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you'd like to know about the risks facing Ability Enterprise, we've discovered 1 warning sign that you should be aware of.

While Ability Enterprise 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.