What Can The Trends At Powertech Technology (TPE:6239) Tell Us About Their Returns?

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'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Powertech Technology (TPE:6239) and its trend of ROCE, we really liked what we saw.

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

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

0.12 = NT$11b ÷ (NT$109b - NT$18b) (Based on the trailing twelve months to September 2020).

Therefore, Powertech Technology has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 10% generated by the Semiconductor industry.

Check out our latest analysis for Powertech Technology

Above you can see how the current ROCE for Powertech 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 Powertech Technology here for free.

How Are Returns Trending?

Investors would be pleased with what's happening at Powertech Technology. The data shows that returns on capital have increased substantially over the last five years to 12%. Basically the business is earning more per dollar of capital invested and in addition to that, 55% more capital is being employed now too. So we're very much inspired by what we're seeing at Powertech Technology thanks to its ability to profitably reinvest capital.

The Bottom Line On Powertech Technology's ROCE

To sum it up, Powertech Technology has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 87% return over the last five years. In light of that, we think it's worth looking further into this stock because if Powertech Technology can keep these trends up, it could have a bright future ahead.

On a final note, we've found 2 warning signs for Powertech Technology that we think you should be aware of.

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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