Should We Be Excited About The Trends Of Returns At Taiwan Optical Platform (TPE:6464)?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Taiwan Optical Platform (TPE:6464) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Taiwan Optical Platform:

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

0.082 = NT$1.5b ÷ (NT$20b - NT$2.5b) (Based on the trailing twelve months to December 2020).

Therefore, Taiwan Optical Platform has an ROCE of 8.2%. In absolute terms, that's a low return, but it's much better than the Media industry average of 6.0%.

Check out our latest analysis for Taiwan Optical Platform

Historical performance is a great place to start when researching a stock so above you can see the gauge for Taiwan Optical Platform's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Taiwan Optical Platform, check out these free graphs here.

So How Is Taiwan Optical Platform's ROCE Trending?

When we looked at the ROCE trend at Taiwan Optical Platform, we didn't gain much confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 8.2%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Taiwan Optical Platform. In light of this, the stock has only gained 17% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

One final note, you should learn about the 2 warning signs we've spotted with Taiwan Optical Platform (including 1 which is potentially serious) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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. 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.
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