What We Think Of Silicon Power Computer & Communications Inc.’s (GTSM:4973) Investment Potential

Today we'll evaluate Silicon Power Computer & Communications Inc. (GTSM:4973) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.

So, How Do We Calculate ROCE?

The formula for calculating the return on capital employed is:

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

Or for Silicon Power Computer & Communications:

0.068 = NT$125m ÷ (NT$2.5b - NT$681m) (Based on the trailing twelve months to September 2019.)

So, Silicon Power Computer & Communications has an ROCE of 6.8%.

See our latest analysis for Silicon Power Computer & Communications

Does Silicon Power Computer & Communications Have A Good ROCE?

One way to assess ROCE is to compare similar companies. It appears that Silicon Power Computer & Communications's ROCE is fairly close to the Tech industry average of 8.1%. Separate from how Silicon Power Computer & Communications stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.

We can see that, Silicon Power Computer & Communications currently has an ROCE of 6.8%, less than the 11% it reported 3 years ago. This makes us wonder if the business is facing new challenges. You can see in the image below how Silicon Power Computer & Communications's ROCE compares to its industry. Click to see more on past growth.

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. You can check if Silicon Power Computer & Communications has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

Silicon Power Computer & Communications's Current Liabilities And Their Impact On Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Silicon Power Computer & Communications has total liabilities of NT$681m and total assets of NT$2.5b. As a result, its current liabilities are equal to approximately 27% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.

The Bottom Line On Silicon Power Computer & Communications's ROCE

That said, Silicon Power Computer & Communications's ROCE is mediocre, there may be more attractive investments around. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.