What Do The Returns At Chenming Electronic Technology (TPE:3013) Mean Going Forward?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Chenming Electronic Technology (TPE:3013) and its trend of ROCE, we really liked what we saw.

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 Chenming Electronic Technology:

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

0.12 = NT$325m ÷ (NT$4.7b - NT$1.9b) (Based on the trailing twelve months to September 2020).

So, Chenming Electronic Technology has an ROCE of 12%. That's a pretty standard return and it's in line with the industry average of 12%.

Check out our latest analysis for Chenming Electronic Technology

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

What The Trend Of ROCE Can Tell Us

Chenming Electronic Technology is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 488% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 41% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

Our Take On Chenming Electronic Technology's ROCE

To sum it up, Chenming Electronic Technology is collecting higher returns from the same amount of capital, and that's impressive. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a separate note, we've found 3 warning signs for Chenming Electronic Technology you'll probably want to know about.

While Chenming Electronic Technology 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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