Returns On Capital At Hitron Technologies (TPE:2419) Paint An Interesting Picture

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. In light of that, when we looked at Hitron Technologies (TPE:2419) and its ROCE trend, we weren't exactly thrilled.

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 Hitron Technologies, this is the formula:

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

0.07 = NT$421m ÷ (NT$12b - NT$6.0b) (Based on the trailing twelve months to September 2020).

Therefore, Hitron Technologies has an ROCE of 7.0%. Ultimately, that's a low return and it under-performs the Communications industry average of 9.8%.

Check out our latest analysis for Hitron Technologies

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hitron Technologies' ROCE against it's prior returns. If you'd like to look at how Hitron Technologies has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Hitron Technologies' historical ROCE trend, it doesn't exactly demand attention. The company has employed 49% more capital in the last five years, and the returns on that capital have remained stable at 7.0%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Another thing to note, Hitron Technologies has a high ratio of current liabilities to total assets of 50%. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

Long story short, while Hitron Technologies has been reinvesting its capital, the returns that it's generating haven't increased. And investors may be recognizing these trends since the stock has only returned a total of 19% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Hitron Technologies does have some risks though, and we've spotted 3 warning signs for Hitron Technologies that you might be interested in.

While Hitron 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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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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