Here’s What’s Happening With Returns At Ichia Technologies (TPE:2402)

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Ichia Technologies (TPE:2402) 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. Analysts use this formula to calculate it for Ichia Technologies:

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

0.034 = NT$193m ÷ (NT$8.6b - NT$2.9b) (Based on the trailing twelve months to September 2020).

Thus, Ichia Technologies has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Electronic industry average of 11%.

See our latest analysis for Ichia Technologies

In the above chart we have measured Ichia Technologies' 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 Ichia Technologies here for free.

What The Trend Of ROCE Can Tell Us

It's nice to see that ROCE is headed in the right direction, even if it is still relatively low. We found that the returns on capital employed over the last five years have risen by 819%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Ichia Technologies appears to been achieving more with less, since the business is using 37% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

In Conclusion...

In the end, Ichia Technologies has proven it's capital allocation skills are good with those higher returns from less amount of capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 49% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing to note, we've identified 2 warning signs with Ichia Technologies and understanding them should be part of your investment process.

While Ichia Technologies may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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