Some Investors May Be Worried About Nuvoton Technology's (TPE:4919) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Nuvoton Technology (TPE:4919) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Nuvoton Technology is:

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

0.016 = NT$322m ÷ (NT$32b - NT$12b) (Based on the trailing twelve months to December 2020).

Thus, Nuvoton Technology has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 11%.

See our latest analysis for Nuvoton Technology

Above you can see how the current ROCE for Nuvoton Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Nuvoton Technology here for free.

How Are Returns Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 13% five years ago, while the business's capital employed increased by 459%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Nuvoton Technology might not have received a full period of earnings contribution from it.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Nuvoton Technology is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 211% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

On a separate note, we've found 4 warning signs for Nuvoton Technology you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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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