Universal Microelectronics (TPE:2413) May Have Issues Allocating Its Capital

What underlying fundamental trends can indicate that a company might be in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after glancing at the trends within Universal Microelectronics (TPE:2413), we weren't too hopeful.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Universal Microelectronics is:

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

0.004 = NT$12m ÷ (NT$4.6b - NT$1.5b) (Based on the trailing twelve months to December 2020).

Thus, Universal Microelectronics has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 11%.

View our latest analysis for Universal Microelectronics

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Universal Microelectronics, check out these free graphs here.

The Trend Of ROCE

In terms of Universal Microelectronics' historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 5.8% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Universal Microelectronics to turn into a multi-bagger.

The Bottom Line On Universal Microelectronics' ROCE

In summary, it's unfortunate that Universal Microelectronics is generating lower returns from the same amount of capital. Yet despite these poor fundamentals, the stock has gained a huge 112% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Like most companies, Universal Microelectronics does come with some risks, and we've found 1 warning sign that you should be aware of.

While Universal Microelectronics 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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