Novatek Microelectronics (TWSE:3034) Is Achieving High Returns On Its Capital

What are the early trends we should look for to identify a stock that could 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Novatek Microelectronics' (TWSE:3034) returns on capital, so let's have a look.

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 Novatek Microelectronics:

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

0.36 = NT$27b ÷ (NT$101b - NT$26b) (Based on the trailing twelve months to December 2023).

So, Novatek Microelectronics has an ROCE of 36%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 8.2%.

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're interested, you can view the analysts predictions in our free analyst report for Novatek Microelectronics .

How Are Returns Trending?

Investors would be pleased with what's happening at Novatek Microelectronics. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 36%. Basically the business is earning more per dollar of capital invested and in addition to that, 158% more capital is being employed now too. So we're very much inspired by what we're seeing at Novatek Microelectronics thanks to its ability to profitably reinvest capital.

Our Take On Novatek Microelectronics' ROCE

To sum it up, Novatek Microelectronics has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 411% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Like most companies, Novatek Microelectronics does come with some risks, and we've found 1 warning sign that you should be aware of.

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.