Investors Shouldn't Overlook The Favourable Returns On Capital At Novatek Microelectronics (TWSE:3034)

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Novatek Microelectronics (TWSE:3034) looks attractive right now, so lets see what the trend of returns can tell us.

Understanding 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 Novatek Microelectronics:

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

0.31 = NT$26b ÷ (NT$108b - NT$24b) (Based on the trailing twelve months to March 2024).

Therefore, Novatek Microelectronics has an ROCE of 31%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 8.0%.

See our latest analysis for Novatek Microelectronics

Above you can see how the current ROCE for Novatek Microelectronics 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 Novatek Microelectronics for free.

What Can We Tell From Novatek Microelectronics' ROCE Trend?

We'd be pretty happy with returns on capital like Novatek Microelectronics. The company has consistently earned 31% for the last five years, and the capital employed within the business has risen 151% in that time. Now considering ROCE is an attractive 31%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You'll see this when looking at well operated businesses or favorable business models.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 22% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line

In summary, we're delighted to see that Novatek Microelectronics has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And long term investors would be thrilled with the 443% return they've received over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

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

Novatek Microelectronics is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.

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