Slowing Rates Of Return At Test-Rite International (TPE:2908) Leave Little Room For Excitement

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Test-Rite International (TPE:2908), we don't think it's current trends fit the mold of a multi-bagger.

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 Test-Rite International:

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

0.052 = NT$1.2b ÷ (NT$38b - NT$16b) (Based on the trailing twelve months to December 2020).

So, Test-Rite International has an ROCE of 5.2%. In absolute terms, that's a low return and it also under-performs the Retail Distributors industry average of 8.9%.

See our latest analysis for Test-Rite International

Historical performance is a great place to start when researching a stock so above you can see the gauge for Test-Rite International's ROCE against it's prior returns. If you'd like to look at how Test-Rite International has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Test-Rite International's ROCE Trending?

In terms of Test-Rite International's historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 5.2% and the business has deployed 69% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a side note, Test-Rite International's current liabilities are still rather high at 41% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Test-Rite International's ROCE

As we've seen above, Test-Rite International's returns on capital haven't increased but it is reinvesting in the business. Since the stock has gained an impressive 69% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we found 3 warning signs for Test-Rite International (1 is a bit concerning) you should be aware of.

While Test-Rite International 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. 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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