Transcend Information (TPE:2451) May Have Issues Allocating Its Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Transcend Information (TPE:2451), we've spotted some signs that it could be struggling, so let's investigate.

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 Transcend Information:

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

0.064 = NT$1.2b ÷ (NT$21b - NT$1.8b) (Based on the trailing twelve months to December 2020).

Thus, Transcend Information has an ROCE of 6.4%. Ultimately, that's a low return and it under-performs the Tech industry average of 11%.

View our latest analysis for Transcend Information

Historical performance is a great place to start when researching a stock so above you can see the gauge for Transcend Information's ROCE against it's prior returns. If you'd like to look at how Transcend Information 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

There is reason to be cautious about Transcend Information, given the returns are trending downwards. About five years ago, returns on capital were 15%, however they're now substantially lower than that as we saw above. 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 Transcend Information to turn into a multi-bagger.

What We Can Learn From Transcend Information's ROCE

In summary, it's unfortunate that Transcend Information is generating lower returns from the same amount of capital. And long term shareholders have watched their investments stay flat over the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Transcend Information (including 1 which is a bit unpleasant) .

While Transcend Information 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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