Excelliance MOS (GTSM:5299) Knows How To Allocate Capital Effectively

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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, the ROCE of Excelliance MOS (GTSM:5299) looks great, so lets see what the trend can tell us.

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. The formula for this calculation on Excelliance MOS is:

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

0.34 = NT$383m ÷ (NT$1.6b - NT$483m) (Based on the trailing twelve months to September 2020).

Therefore, Excelliance MOS has an ROCE of 34%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 10%.

Check out our latest analysis for Excelliance MOS

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

What The Trend Of ROCE Can Tell Us

Excelliance MOS has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 34% on its capital. Not only that, but the company is utilizing 141% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 30% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Bottom Line On Excelliance MOS' ROCE

To the delight of most shareholders, Excelliance MOS has now broken into profitability. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you want to continue researching Excelliance MOS, you might be interested to know about the 1 warning sign that our analysis has discovered.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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