Davicom Semiconductor (TPE:3094) Has Some Difficulty Using Its Capital Effectively

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. 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 glancing at the trends within Davicom Semiconductor (TPE:3094), we weren't too hopeful.

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 Davicom Semiconductor:

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

0.018 = NT$20m ÷ (NT$1.2b - NT$38m) (Based on the trailing twelve months to December 2020).

Therefore, Davicom Semiconductor has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 11%.

Check out 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'd like to look at how Davicom Semiconductor has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Davicom Semiconductor's ROCE Trending?

We are a bit worried about the trend of returns on capital at Davicom Semiconductor. About five years ago, returns on capital were 4.4%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Davicom Semiconductor becoming one if things continue as they have.

In Conclusion...

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 87% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Davicom Semiconductor (including 1 which is a bit concerning) .

While Davicom 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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