Returns On Capital Signal Tricky Times Ahead For AP Memory Technology (TPE:6531)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at AP Memory Technology (TPE:6531) and its ROCE trend, we weren't exactly thrilled.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for AP Memory Technology, this is the formula:

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

0.17 = NT$520m ÷ (NT$4.0b - NT$855m) (Based on the trailing twelve months to December 2020).

So, AP Memory Technology has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 11% it's much better.

See our latest analysis for AP Memory Technology

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of AP Memory Technology, check out these free graphs here.

What Can We Tell From AP Memory Technology's ROCE Trend?

When we looked at the ROCE trend at AP Memory Technology, we didn't gain much confidence. To be more specific, ROCE has fallen from 29% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On AP Memory Technology's ROCE

To conclude, we've found that AP Memory Technology is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 959% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for AP Memory Technology (of which 2 are significant!) that you should know about.

While AP Memory 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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