ITE Tech (TPE:3014) Is Very Good At Capital Allocation

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. So when we looked at the ROCE trend of ITE Tech (TPE:3014) we really liked what we saw.

What is 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. To calculate this metric for ITE Tech, this is the formula:

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

0.22 = NT$974m ÷ (NT$5.8b - NT$1.3b) (Based on the trailing twelve months to September 2020).

Thus, ITE Tech has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 10%.

See our latest analysis for ITE Tech

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 ITE Tech's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

We like the trends that we're seeing from ITE Tech. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 22%. Basically the business is earning more per dollar of capital invested and in addition to that, 22% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Key Takeaway

All in all, it's terrific to see that ITE Tech is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 261% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if ITE Tech can keep these trends up, it could have a bright future ahead.

On a final note, we found 2 warning signs for ITE Tech (1 is potentially serious) you should be aware of.

ITE Tech 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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