Returns On Capital - An Important Metric For Taiwan Alpha Electronic (GTSM:6204)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. So on that note, Taiwan Alpha Electronic (GTSM:6204) looks quite promising in regards to its trends of return on capital.

What is Return On Capital Employed (ROCE)?

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 Taiwan Alpha Electronic is:

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

0.046 = NT$39m ÷ (NT$944m - NT$113m) (Based on the trailing twelve months to September 2020).

So, Taiwan Alpha Electronic has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Electronic industry average of 11%.

Check out our latest analysis for Taiwan Alpha Electronic

Historical performance is a great place to start when researching a stock so above you can see the gauge for Taiwan Alpha Electronic's ROCE against it's prior returns. If you're interested in investigating Taiwan Alpha Electronic's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

While the ROCE isn't as high as some other companies out there, it's great to see it's on the up. The figures show that over the last five years, ROCE has grown 64% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Bottom Line On Taiwan Alpha Electronic's ROCE

In summary, we're delighted to see that Taiwan Alpha Electronic has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. 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.

One final note, you should learn about the 3 warning signs we've spotted with Taiwan Alpha Electronic (including 1 which is significant) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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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