We Like These Underlying Return On Capital Trends At Wafer Works (GTSM:6182)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. With that in mind, we've noticed some promising trends at Wafer Works (GTSM:6182) so let's look a bit deeper.

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. To calculate this metric for Wafer Works, this is the formula:

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

0.039 = NT$737m ÷ (NT$23b - NT$4.8b) (Based on the trailing twelve months to December 2020).

Therefore, Wafer Works has an ROCE of 3.9%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 11%.

See our latest analysis for Wafer Works

Above you can see how the current ROCE for Wafer Works compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Wafer Works here for free.

So How Is Wafer Works' ROCE Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 3.9%. The amount of capital employed has increased too, by 75%. So we're very much inspired by what we're seeing at Wafer Works thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 20%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Wafer Works has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From Wafer Works' ROCE

All in all, it's terrific to see that Wafer Works is reaping the rewards from prior investments and is growing its capital base. And a remarkable 576% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Wafer Works can keep these trends up, it could have a bright future ahead.

One more thing, we've spotted 4 warning signs facing Wafer Works that you might find interesting.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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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