Here’s What’s Happening With Returns At Welltend Technology (TPE:3021)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Welltend Technology (TPE:3021) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Welltend Technology:

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

0.14 = NT$177m ÷ (NT$2.6b - NT$1.3b) (Based on the trailing twelve months to September 2020).

Thus, Welltend Technology has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 12% generated by the Tech industry.

See our latest analysis for Welltend Technology

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're interested in investigating Welltend Technology's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Welltend Technology's ROCE Trending?

Welltend 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 160% 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. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

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. Effectively this means that suppliers or short-term creditors are now funding 50% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

The Bottom Line On Welltend Technology's ROCE

To bring it all together, Welltend Technology has done well to increase the returns it's generating from its capital employed. Since the stock has only returned 38% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

One final note, you should learn about the 3 warning signs we've spotted with Welltend Technology (including 1 which is is significant) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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