Investors Should Be Encouraged By Taiwan Semiconductor Manufacturing's (TPE:2330) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. With that in mind, the ROCE of Taiwan Semiconductor Manufacturing (TPE:2330) looks great, so lets see what the trend can tell us.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Taiwan Semiconductor Manufacturing, this is the formula:

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

0.26 = NT$589b ÷ (NT$2.9t - NT$662b) (Based on the trailing twelve months to March 2021).

Thus, Taiwan Semiconductor Manufacturing has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 11%.

See our latest analysis for Taiwan Semiconductor Manufacturing

In the above chart we have measured Taiwan Semiconductor Manufacturing'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 Manufacturing.

So How Is Taiwan Semiconductor Manufacturing's ROCE Trending?

We like the trends that we're seeing from Taiwan Semiconductor Manufacturing. Over the last five years, returns on capital employed have risen substantially to 26%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 52%. So we're very much inspired by what we're seeing at Taiwan Semiconductor Manufacturing thanks to its ability to profitably reinvest capital.

What We Can Learn From Taiwan Semiconductor Manufacturing's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Taiwan Semiconductor Manufacturing has. 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.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.

Taiwan Semiconductor Manufacturing is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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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