Capital Allocation Trends At ChipMOS TECHNOLOGIES (TWSE:8150) Aren't Ideal

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at ChipMOS TECHNOLOGIES (TWSE:8150), it didn't seem to tick all of these boxes.

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 ChipMOS TECHNOLOGIES, this is the formula:

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

0.049 = NT$1.9b ÷ (NT$46b - NT$7.4b) (Based on the trailing twelve months to December 2023).

Therefore, ChipMOS TECHNOLOGIES has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 8.2%.

View our latest analysis for ChipMOS TECHNOLOGIES

Above you can see how the current ROCE for ChipMOS TECHNOLOGIES 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 ChipMOS TECHNOLOGIES for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at ChipMOS TECHNOLOGIES doesn't inspire confidence. Around five years ago the returns on capital were 7.5%, but since then they've fallen to 4.9%. However it looks like ChipMOS TECHNOLOGIES might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

In summary, ChipMOS TECHNOLOGIES is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 126% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

ChipMOS TECHNOLOGIES does have some risks though, and we've spotted 2 warning signs for ChipMOS TECHNOLOGIES that you might be interested in.

While ChipMOS TECHNOLOGIES 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.