Should You Be Impressed By FineMat Applied Materials' (TPE:6698) 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at FineMat Applied Materials (TPE:6698) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper 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. Analysts use this formula to calculate it for FineMat Applied Materials:

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

0.012 = NT$22m ÷ (NT$2.2b - NT$274m) (Based on the trailing twelve months to September 2020).

Thus, FineMat Applied Materials has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 10%.

View our latest analysis for FineMat Applied Materials

In the above chart we have measured FineMat Applied Materials' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering FineMat Applied Materials here for free.

The Trend Of ROCE

Unfortunately, the trend isn't great with ROCE falling from 4.4% four years ago, while capital employed has grown 258%. Usually this isn't ideal, but given FineMat Applied Materials conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with FineMat Applied Materials' earnings and if they change as a result from the capital raise.

In Conclusion...

In summary, we're somewhat concerned by FineMat Applied Materials' diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 41% from where it was year ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for FineMat Applied Materials (of which 1 makes us a bit uncomfortable!) that you should know about.

While FineMat Applied Materials isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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