Here's What's Concerning About Weltrend Semiconductor's (TWSE:2436) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Weltrend Semiconductor (TWSE:2436) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Weltrend Semiconductor is:

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

0.022 = NT$118m ÷ (NT$6.1b - NT$881m) (Based on the trailing twelve months to June 2024).

Thus, Weltrend Semiconductor has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 8.8%.

View our latest analysis for Weltrend Semiconductor

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 , check out these free graphs detailing revenue and cash flow performance of Weltrend Semiconductor.

What Can We Tell From Weltrend Semiconductor's ROCE Trend?

When we looked at the ROCE trend at Weltrend Semiconductor, we didn't gain much confidence. Around five years ago the returns on capital were 5.4%, but since then they've fallen to 2.2%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

While returns have fallen for Weltrend Semiconductor in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 163% to shareholders in the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you want to know some of the risks facing Weltrend Semiconductor we've found 4 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

While Weltrend Semiconductor 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.