Will TA-I Technology's (TPE:2478) Growth In ROCE Persist?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in TA-I Technology's (TPE:2478) returns on capital, so let's have a look.

Understanding 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. Analysts use this formula to calculate it for TA-I Technology:

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

0.12 = NT$735m ÷ (NT$8.8b - NT$2.6b) (Based on the trailing twelve months to September 2020).

Thus, TA-I Technology has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 11% generated by the Electronic industry.

Check out our latest analysis for TA-I Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for TA-I Technology's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of TA-I Technology, check out these free graphs here.

So How Is TA-I Technology's ROCE Trending?

TA-I Technology is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 266% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

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. The current liabilities has increased to 30% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. 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 TA-I Technology's ROCE

To sum it up, TA-I Technology is collecting higher returns from the same amount of capital, and that's impressive. And a remarkable 308% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if TA-I Technology can keep these trends up, it could have a bright future ahead.

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

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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