If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Global Unichip (TPE:3443) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Global Unichip is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = NT$964m ÷ (NT$9.7b - NT$4.9b) (Based on the trailing twelve months to December 2020).
Thus, Global Unichip has an ROCE of 20%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 10% it's much better.
Check out our latest analysis for Global Unichip
In the above chart we have measured Global Unichip's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Global Unichip.
What The Trend Of ROCE Can Tell Us
We like the trends that we're seeing from Global Unichip. The data shows that returns on capital have increased substantially over the last five years to 20%. Basically the business is earning more per dollar of capital invested and in addition to that, 35% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
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. The current liabilities has increased to 50% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.
In Conclusion...
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Global Unichip has. Since the stock has returned a staggering 417% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
While Global Unichip looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether 3443 is currently trading for a fair price.
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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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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About TWSE:3443
Global Unichip
Researches, develops, produces, tests, and sells embedded memory and logic components, cell libraries, and EDA tools for various application ICs in China, the United States, Taiwan, Japan, Korea, and Europe.
Exceptional growth potential with flawless balance sheet and pays a dividend.
