Will the Promising Trends At Mercuries Data Systems (TPE:2427) Continue?

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. So when we looked at Mercuries Data Systems (TPE:2427) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

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 Mercuries Data Systems, this is the formula:

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

0.055 = NT$128m ÷ (NT$4.3b - NT$2.0b) (Based on the trailing twelve months to September 2020).

So, Mercuries Data Systems has an ROCE of 5.5%. Ultimately, that's a low return and it under-performs the IT industry average of 15%.

See our latest analysis for Mercuries Data Systems

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Mercuries Data Systems' past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Shareholders will be relieved that Mercuries Data Systems has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 5.5%, which is always encouraging. While returns have increased, the amount of capital employed by Mercuries Data Systems has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 46% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

The Key Takeaway

To bring it all together, Mercuries Data Systems has done well to increase the returns it's generating from its capital employed. Since the stock has returned a staggering 118% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Mercuries Data Systems does have some risks, we noticed 3 warning signs (and 1 which is a bit concerning) we think you should know about.

While Mercuries Data Systems isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

If you’re looking to trade Mercuries Data Systems, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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