Returns On Capital - An Important Metric For Weltrend Semiconductor (TPE:2436)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. Speaking of which, we noticed some great changes in Weltrend Semiconductor's (TPE:2436) returns on capital, so let's have a look.

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. The formula for this calculation on Weltrend Semiconductor is:

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

0.031 = NT$95m ÷ (NT$4.3b - NT$1.2b) (Based on the trailing twelve months to September 2020).

Thus, Weltrend Semiconductor has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 10%.

See our latest analysis for Weltrend Semiconductor

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're interested in investigating Weltrend Semiconductor's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Weltrend Semiconductor is reaping rewards from its investments and has now broken into profitability. The company now earns 3.1% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 29% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Bottom Line

To bring it all together, Weltrend Semiconductor has done well to increase the returns it's generating from its capital employed. And a remarkable 125% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.

If you want to know some of the risks facing Weltrend Semiconductor we've found 3 warning signs (1 is potentially serious!) 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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