If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Chroma ATE (TPE:2360) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Chroma ATE, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = NT$2.7b ÷ (NT$27b - NT$7.7b) (Based on the trailing twelve months to September 2020).
Therefore, Chroma ATE has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 11% generated by the Electronic industry.
View our latest analysis for Chroma ATE
Above you can see how the current ROCE for Chroma ATE compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Chroma ATE here for free.
What Does the ROCE Trend For Chroma ATE Tell Us?
We like the trends that we're seeing from Chroma ATE. The data shows that returns on capital have increased substantially over the last five years to 14%. The amount of capital employed has increased too, by 57%. So we're very much inspired by what we're seeing at Chroma ATE thanks to its ability to profitably reinvest capital.
Our Take On Chroma ATE's ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Chroma ATE has. Since the stock has returned a staggering 202% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
On a separate note, we've found 1 warning sign for Chroma ATE you'll probably want to know about.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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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About TWSE:2360
Chroma ATE
Designs, assembles, manufactures, sells, repairs, and maintains software/hardware for computers and peripherals, computerized automatic test systems, electronic test instruments, signal generators, power supplies, and telecom power supplies in Taiwan, China, the United States, and internationally.
Flawless balance sheet with high growth potential.
