Taiwan Surface Mounting Technology (TPE:6278) Is Looking To Continue Growing Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Taiwan Surface Mounting Technology (TPE:6278) looks quite promising in regards to its trends of return on capital.

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

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. To calculate this metric for Taiwan Surface Mounting Technology, this is the formula:

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

0.14 = NT$2.5b ÷ (NT$38b - NT$20b) (Based on the trailing twelve months to December 2020).

Thus, Taiwan Surface Mounting Technology has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 11% generated by the Semiconductor industry.

Check out our latest analysis for Taiwan Surface Mounting Technology

Above you can see how the current ROCE for Taiwan Surface Mounting 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 Taiwan Surface Mounting Technology here for free.

How Are Returns Trending?

Investors would be pleased with what's happening at Taiwan Surface Mounting Technology. The data shows that returns on capital have increased substantially over the last five years to 14%. 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 24%. So we're very much inspired by what we're seeing at Taiwan Surface Mounting Technology thanks to its ability to profitably reinvest capital.

On a side note, Taiwan Surface Mounting Technology's current liabilities are still rather high at 53% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Taiwan Surface Mounting Technology's ROCE

In summary, it's great to see that Taiwan Surface Mounting 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 a remarkable 393% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Taiwan Surface Mounting Technology can keep these trends up, it could have a bright future ahead.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Taiwan Surface Mounting Technology (of which 1 doesn't sit too well with us!) that you should know about.

While Taiwan Surface Mounting Technology may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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