Today we are going to look at Taiwan Mask Corporation (TPE:2338) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
So, How Do We Calculate ROCE?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Taiwan Mask:
0.0036 = NT$14m ÷ (NT$5.7b - NT$1.7b) (Based on the trailing twelve months to December 2019.)
So, Taiwan Mask has an ROCE of 0.4%.
Check out our latest analysis for Taiwan Mask
Does Taiwan Mask Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Taiwan Mask's ROCE appears to be significantly below the 9.6% average in the Semiconductor industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Regardless of how Taiwan Mask stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). It is likely that there are more attractive prospects out there.
Taiwan Mask reported an ROCE of 0.4% -- better than 3 years ago, when the company didn't make a profit. That suggests the business has returned to profitability. The image below shows how Taiwan Mask's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Taiwan Mask.
What Are Current Liabilities, And How Do They Affect Taiwan Mask's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Taiwan Mask has current liabilities of NT$1.7b and total assets of NT$5.7b. Therefore its current liabilities are equivalent to approximately 30% of its total assets. With a medium level of current liabilities boosting the ROCE a little, Taiwan Mask's low ROCE is unappealing.
What We Can Learn From Taiwan Mask's ROCE
There are likely better investments out there. You might be able to find a better investment than Taiwan Mask. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.
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