Returns On Capital Tell Us A Lot About Walton Advanced Engineering (TPE:8110)

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Walton Advanced Engineering (TPE:8110), we've spotted some signs that it could be struggling, so let's investigate.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Walton Advanced Engineering:

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

0.0025 = NT$33m ÷ (NT$16b - NT$3.1b) (Based on the trailing twelve months to September 2020).

Therefore, Walton Advanced Engineering has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 10%.

See our latest analysis for Walton Advanced Engineering

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're interested in investigating Walton Advanced Engineering's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Walton Advanced Engineering's ROCE Trend?

We are a bit worried about the trend of returns on capital at Walton Advanced Engineering. To be more specific, the ROCE was 1.1% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Walton Advanced Engineering becoming one if things continue as they have.

What We Can Learn From Walton Advanced Engineering's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Yet despite these concerning fundamentals, the stock has performed strongly with a 58% return over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you'd like to know more about Walton Advanced Engineering, we've spotted 3 warning signs, and 1 of them makes us a bit uncomfortable.

While Walton Advanced Engineering 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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