We Like These Underlying Return On Capital Trends At Ichia Technologies (TPE:2402)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Ichia Technologies (TPE:2402) and its trend of ROCE, we really liked what we saw.

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. To calculate this metric for Ichia Technologies, this is the formula:

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

0.033 = NT$196m ÷ (NT$9.5b - NT$3.6b) (Based on the trailing twelve months to December 2020).

Thus, Ichia Technologies has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Electronic industry average of 10%.

View our latest analysis for Ichia Technologies

Above you can see how the current ROCE for Ichia Technologies compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Ichia Technologies.

What Does the ROCE Trend For Ichia Technologies Tell Us?

Like most people, we're pleased that Ichia Technologies is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 34%. Ichia Technologies could be selling under-performing assets since the ROCE is improving.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 38% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

Our Take On Ichia Technologies' ROCE

In a nutshell, we're pleased to see that Ichia Technologies has been able to generate higher returns from less capital. Since the stock has only returned 12% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Like most companies, Ichia Technologies does come with some risks, and we've found 2 warning signs that you should be aware of.

While Ichia Technologies isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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