Will Taiwan Semiconductor (GTSM:5425) Multiply In Value Going Forward?

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Taiwan Semiconductor (GTSM:5425) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Taiwan Semiconductor, this is the formula:

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

0.12 = NT$1.2b ÷ (NT$15b - NT$4.6b) (Based on the trailing twelve months to September 2020).

Therefore, Taiwan Semiconductor has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 10% generated by the Semiconductor industry.

Check out our latest analysis for Taiwan Semiconductor

In the above chart we have measured Taiwan Semiconductor's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Taiwan Semiconductor.

The Trend Of ROCE

The trend of ROCE doesn't look fantastic because it's fallen from 19% five years ago, while the business's capital employed increased by 41%. That being said, Taiwan Semiconductor raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Taiwan Semiconductor might not have received a full period of earnings contribution from it.

The Key Takeaway

To conclude, we've found that Taiwan Semiconductor is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 137% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing, we've spotted 3 warning signs facing Taiwan Semiconductor that you might find interesting.

While Taiwan Semiconductor 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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