Is There More Growth In Store For Elite Semiconductor Microelectronics Tech's (TPE:3006) Returns On Capital?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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, we've noticed some promising trends at Elite Semiconductor Microelectronics Tech (TPE:3006) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

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 Elite Semiconductor Microelectronics Tech:

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

0.16 = NT$1.3b ÷ (NT$12b - NT$4.4b) (Based on the trailing twelve months to September 2020).

So, Elite Semiconductor Microelectronics Tech has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 10% generated by the Semiconductor industry.

Check out our latest analysis for Elite Semiconductor Microelectronics Tech

Above you can see how the current ROCE for Elite Semiconductor Microelectronics Tech compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Elite Semiconductor Microelectronics Tech Tell Us?

Elite Semiconductor Microelectronics Tech is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 16%. Basically the business is earning more per dollar of capital invested and in addition to that, 23% more capital is being employed now too. So we're very much inspired by what we're seeing at Elite Semiconductor Microelectronics Tech thanks to its ability to profitably reinvest capital.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 36% 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.

Our Take On Elite Semiconductor Microelectronics Tech's ROCE

To sum it up, Elite Semiconductor Microelectronics Tech has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a final note, we found 2 warning signs for Elite Semiconductor Microelectronics Tech (1 can't be ignored) you should be aware of.

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