Returns On Capital - An Important Metric For Welltend Technology (TPE:3021)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. So on that note, Welltend Technology (TPE:3021) looks quite promising in regards to its trends of return on capital.

What is Return On Capital Employed (ROCE)?

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. To calculate this metric for Welltend Technology, this is the formula:

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

0.14 = NT$179m ÷ (NT$2.6b - NT$1.3b) (Based on the trailing twelve months to September 2020).

Therefore, Welltend Technology has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Tech industry average of 12%.

See our latest analysis for Welltend Technology

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

What Does the ROCE Trend For Welltend Technology Tell Us?

Welltend Technology's ROCE growth is quite impressive. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 161% over the last five years. 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.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 50% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Bottom Line

To sum it up, Welltend Technology is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a solid 57% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Welltend Technology can keep these trends up, it could have a bright future ahead.

On a final note, we found 3 warning signs for Welltend Technology (1 is potentially serious) you should be aware of.

While Welltend 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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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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