Will RichWave Technology (TPE:4968) Repeat Its Return Growth Of The Past?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. And in light of that, the trends we're seeing at RichWave Technology's (TPE:4968) look very promising so lets take a look.

What is Return On Capital Employed (ROCE)?

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 RichWave Technology, this is the formula:

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

0.46 = NT$1.0b ÷ (NT$3.7b - NT$1.5b) (Based on the trailing twelve months to December 2020).

Thus, RichWave Technology has an ROCE of 46%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 11%.

View our latest analysis for RichWave Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for RichWave Technology's ROCE against it's prior returns. If you're interested in investigating RichWave Technology's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

RichWave Technology is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 46%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 172%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

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 40% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Key Takeaway

In summary, it's great to see that RichWave Technology can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

RichWave Technology does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

RichWave Technology is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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