What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. In light of that, when we looked at Algoltek (GTSM:6684) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What is it?
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. Analysts use this formula to calculate it for Algoltek:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.017 = NT$5.8m ÷ (NT$412m - NT$73m) (Based on the trailing twelve months to June 2020).
So, Algoltek has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 10%.
View our latest analysis for Algoltek
Historical performance is a great place to start when researching a stock so above you can see the gauge for Algoltek's ROCE against it's prior returns. If you're interested in investigating Algoltek's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Algoltek Tell Us?
On the surface, the trend of ROCE at Algoltek doesn't inspire confidence. To be more specific, ROCE has fallen from 9.5% over the last four years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
What We Can Learn From Algoltek's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Algoltek. And long term investors must be optimistic going forward because the stock has returned a huge 214% to shareholders in the last year. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.
Algoltek does have some risks, we noticed 3 warning signs (and 1 which is potentially serious) we think you should know about.
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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About TPEX:6684
Flawless balance sheet very low.
