If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Weltrend Semiconductor (TPE:2436) so let's look a bit deeper.
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. Analysts use this formula to calculate it for Weltrend Semiconductor:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.038 = NT$126m ÷ (NT$4.3b - NT$1.0b) (Based on the trailing twelve months to December 2020).
So, Weltrend Semiconductor has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 11%.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Weltrend Semiconductor has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
While there are companies with higher returns on capital out there, we still find the trend at Weltrend Semiconductor promising. The figures show that over the last five years, ROCE has grown 750% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
The Bottom Line On Weltrend Semiconductor's ROCE
To sum it up, Weltrend Semiconductor is collecting higher returns from the same amount of capital, and that's impressive. And a remarkable 108% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.
If you want to know some of the risks facing Weltrend Semiconductor we've found 2 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.
While Weltrend 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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