ChipMOS TECHNOLOGIES' (TWSE:8150) Returns On Capital Not Reflecting Well On The Business

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at ChipMOS TECHNOLOGIES (TWSE:8150) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper 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. 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)

0.052 = NT$1.9b ÷ (NT$45b - NT$8.5b) (Based on the trailing twelve months to June 2024).

So, ChipMOS TECHNOLOGIES has an ROCE of 5.2%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 8.8%.

See 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're interested, you can view the analysts predictions in our free analyst report for ChipMOS TECHNOLOGIES .

What Can We Tell From ChipMOS TECHNOLOGIES' ROCE Trend?

On the surface, the trend of ROCE at ChipMOS TECHNOLOGIES doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.2% from 7.5% five years ago. 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. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From ChipMOS TECHNOLOGIES' ROCE

While returns have fallen for ChipMOS TECHNOLOGIES in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Furthermore the stock has climbed 44% over the last five years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you'd like to know about the risks facing ChipMOS TECHNOLOGIES, we've discovered 1 warning sign that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.