FittechLtd (TPE:6706) Is Looking To Continue Growing Its Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in FittechLtd's (TPE:6706) returns on capital, so let's have a look.

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

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. The formula for this calculation on FittechLtd is:

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

0.14 = NT$475m ÷ (NT$5.0b - NT$1.6b) (Based on the trailing twelve months to December 2020).

Thus, FittechLtd 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.

See our latest analysis for FittechLtd

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

How Are Returns Trending?

We like the trends that we're seeing from FittechLtd. The numbers show that in the last five years, the returns generated on capital employed have grown considerably 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 938%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

One more thing to note, FittechLtd has decreased current liabilities to 32% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that FittechLtd has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

Our Take On FittechLtd's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what FittechLtd has. And with the stock having performed exceptionally well over the last year, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if FittechLtd can keep these trends up, it could have a bright future ahead.

FittechLtd does have some risks though, and we've spotted 1 warning sign for FittechLtd that you might be interested in.

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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