The Trends At Test-Rite International (TPE:2908) That You Should Know About

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. Although, when we looked at Test-Rite International (TPE:2908), it didn't seem to tick all of these boxes.

What is 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 Test-Rite International:

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

0.055 = NT$1.2b ÷ (NT$37b - NT$16b) (Based on the trailing twelve months to September 2020).

Thus, Test-Rite International has an ROCE of 5.5%. In absolute terms, that's a low return but it's around the Retail Distributors industry average of 6.2%.

View 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.

What Can We Tell From Test-Rite International's ROCE Trend?

In terms of Test-Rite International's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 5.5% from 7.6% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a separate but related note, it's important to know that Test-Rite International has a current liabilities to total assets ratio of 42%, which we'd consider pretty high. 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

To conclude, we've found that Test-Rite International is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 70% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a final note, we found 3 warning signs for Test-Rite International (1 doesn't sit too well with us) 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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