Will The ROCE Trend At Unimicron Technology (TPE:3037) Continue?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Unimicron Technology (TPE:3037) and its trend of ROCE, we really liked what we saw.

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. The formula for this calculation on Unimicron Technology is:

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

0.056 = NT$4.4b ÷ (NT$118b - NT$39b) (Based on the trailing twelve months to September 2020).

Therefore, Unimicron Technology has an ROCE of 5.6%. Ultimately, that's a low return and it under-performs the Electronic industry average of 11%.

View our latest analysis for Unimicron Technology

Above you can see how the current ROCE for Unimicron Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Unimicron Technology here for free.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Unimicron Technology is reaping rewards from its investments and has now broken into profitability. The company now earns 5.6% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

The Bottom Line On Unimicron Technology's ROCE

To bring it all together, Unimicron Technology has done well to increase the returns it's generating from its capital employed. Since the stock has returned a staggering 584% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Unimicron Technology does have some risks though, and we've spotted 3 warning signs for Unimicron Technology that you might be interested in.

While Unimicron Technology may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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