Returns On Capital At AMPACS (TWSE:6743) Paint A Concerning Picture

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think AMPACS (TWSE:6743) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

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 AMPACS:

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

0.041 = NT$141m ÷ (NT$8.1b - NT$4.6b) (Based on the trailing twelve months to September 2023).

So, AMPACS has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 8.1%.

Check out our latest analysis for AMPACS

Above you can see how the current ROCE for AMPACS compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for AMPACS .

What Can We Tell From AMPACS' ROCE Trend?

On the surface, the trend of ROCE at AMPACS doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.1% from 24% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 57%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

What We Can Learn From AMPACS' ROCE

We're a bit apprehensive about AMPACS because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 61% from where it was three years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

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

While AMPACS isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.