Accton Technology (TPE:2345) Knows How To Allocate Capital Effectively

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Accton Technology (TPE:2345) looks great, so lets see what the trend can tell us.

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. The formula for this calculation on Accton Technology is:

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

0.40 = NT$6.0b ÷ (NT$29b - NT$14b) (Based on the trailing twelve months to September 2020).

Thus, Accton Technology has an ROCE of 40%. In absolute terms that's a great return and it's even better than the Communications industry average of 9.8%.

See our latest analysis for Accton Technology

In the above chart we have measured Accton Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Accton Technology here for free.

What Can We Tell From Accton Technology's ROCE Trend?

Investors would be pleased with what's happening at Accton Technology. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 40%. Basically the business is earning more per dollar of capital invested and in addition to that, 90% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Another thing to note, Accton Technology has a high ratio of current liabilities to total assets of 48%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Accton Technology's ROCE

To sum it up, Accton Technology has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 933% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Accton Technology can keep these trends up, it could have a bright future ahead.

Accton Technology does have some risks though, and we've spotted 2 warning signs for Accton Technology that you might be interested in.

Accton Technology is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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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