These Return Metrics Don't Make Leadtrend Technology (TPE:3588) Look Too Strong

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within Leadtrend Technology (TPE:3588), we weren't too hopeful.

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. Analysts use this formula to calculate it for Leadtrend Technology:

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

0.058 = NT$78m ÷ (NT$1.6b - NT$272m) (Based on the trailing twelve months to December 2020).

Therefore, Leadtrend Technology has an ROCE of 5.8%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 11%.

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're interested in investigating Leadtrend Technology's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Leadtrend Technology's ROCE Trending?

We are a bit worried about the trend of returns on capital at Leadtrend Technology. To be more specific, the ROCE was 7.8% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 Leadtrend Technology becoming one if things continue as they have.

The Key Takeaway

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 253%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we found 2 warning signs for Leadtrend Technology (1 makes us a bit uncomfortable) you should be aware of.

While Leadtrend Technology 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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