What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in eCloudvalley Digital Technology’s (GTSM:6689) returns on capital, so let’s have a look.
Return On Capital Employed (ROCE): What is it?
For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on eCloudvalley Digital Technology is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.10 = NT$165m ÷ (NT$2.9b – NT$1.3b) (Based on the trailing twelve months to June 2020).
Therefore, eCloudvalley Digital Technology has an ROCE of 10%. In absolute terms, that’s a pretty standard return but compared to the IT industry average it falls behind.
Historical performance is a great place to start when researching a stock so above you can see the gauge for eCloudvalley Digital Technology’s ROCE against it’s prior returns. If you’d like to look at how eCloudvalley Digital Technology has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is eCloudvalley Digital Technology’s ROCE Trending?
eCloudvalley Digital Technology has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses four years ago, but now it’s earning 10% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, eCloudvalley Digital Technology is utilizing 6,401% more capital than it was four years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.On a related note, the company’s ratio of current liabilities to total assets has decreased to 44%, which basically reduces it’s funding from the likes of short-term creditors or suppliers. This tells us that eCloudvalley Digital Technology has grown its returns without a reliance on increasing their current liabilities, which we’re very happy with. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.
The Bottom Line On eCloudvalley Digital Technology’s ROCE
To the delight of most shareholders, eCloudvalley Digital Technology has now broken into profitability. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 14% return over the last year. Therefore, we think it would be worth your time to check if these trends are going to continue.
One more thing to note, we’ve identified 1 warning sign with eCloudvalley Digital Technology and understanding this should be part of your investment process.
While eCloudvalley Digital Technology isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is general in nature. 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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