Is Leadtrend Technology (TPE:3588) Headed For Trouble?

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base 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 glancing at the trends within Leadtrend Technology (TPE:3588), we weren't too hopeful.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Leadtrend Technology, this is the formula:

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

0.051 = NT$67m ÷ (NT$1.6b - NT$292m) (Based on the trailing twelve months to September 2020).

Therefore, Leadtrend Technology has an ROCE of 5.1%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 10%.

Check out our latest analysis for Leadtrend Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Leadtrend Technology's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Leadtrend Technology, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at Leadtrend Technology. Unfortunately the returns on capital have diminished from the 7.9% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Leadtrend Technology to turn into a multi-bagger.

Our Take On Leadtrend Technology's ROCE

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. Since the stock has skyrocketed 162% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One final note, you should learn about the 2 warning signs we've spotted with Leadtrend Technology (including 1 which is significant) .

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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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