Are Investors Concerned With What's Going On At Davicom Semiconductor (TPE:3094)?

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after we looked into Davicom Semiconductor (TPE:3094), the trends above didn't look too great.

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. To calculate this metric for Davicom Semiconductor, this is the formula:

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

0.02 = NT$23m ÷ (NT$1.1b - NT$32m) (Based on the trailing twelve months to September 2020).

Thus, Davicom Semiconductor has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 10%.

See our latest analysis for Davicom Semiconductor

Historical performance is a great place to start when researching a stock so above you can see the gauge for Davicom Semiconductor's ROCE against it's prior returns. If you're interested in investigating Davicom Semiconductor's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Davicom Semiconductor's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 3.9% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Davicom Semiconductor to turn into a multi-bagger.

In Conclusion...

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Despite the concerning underlying trends, the stock has actually gained 6.5% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you'd like to know more about Davicom Semiconductor, we've spotted 4 warning signs, and 1 of them makes us a bit uncomfortable.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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