What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Faraday Technology (TWSE:3035) and its ROCE trend, we weren't exactly thrilled.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Faraday Technology, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.092 = NT$1.3b ÷ (NT$18b - NT$3.9b) (Based on the trailing twelve months to September 2024).
Thus, Faraday Technology has an ROCE of 9.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.3%.
See our latest analysis for Faraday Technology
In the above chart we have measured Faraday Technology's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Faraday Technology .
How Are Returns Trending?
The returns on capital haven't changed much for Faraday Technology in recent years. The company has employed 172% more capital in the last five years, and the returns on that capital have remained stable at 9.2%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
The Key Takeaway
In summary, Faraday Technology has simply been reinvesting capital and generating the same low rate of return as before. Yet to long term shareholders the stock has gifted them an incredible 391% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
On a separate note, we've found 1 warning sign for Faraday Technology you'll probably want to know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.
About TWSE:3035
Faraday Technology
Operates as a fabless ASIC/SoC and silicon intellectual property (IP) provider in China, Taiwan, Japan, the United States, and internationally.
Exceptional growth potential with excellent balance sheet.
