What Do The Returns At EDIMAX Technology (TPE:3047) Mean Going Forward?

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at EDIMAX Technology (TPE:3047) and its trend of ROCE, we really liked what we saw.

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

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

0.098 = NT$442m ÷ (NT$7.7b - NT$3.2b) (Based on the trailing twelve months to September 2020).

Thus, EDIMAX Technology has an ROCE of 9.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.8%.

View our latest analysis for EDIMAX 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'd like to look at how EDIMAX Technology has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From EDIMAX Technology's ROCE Trend?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 9.8%. Basically the business is earning more per dollar of capital invested and in addition to that, 68% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a separate but related note, it's important to know that EDIMAX Technology has a current liabilities to total assets ratio of 42%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On EDIMAX Technology's ROCE

All in all, it's terrific to see that EDIMAX Technology is reaping the rewards from prior investments and is growing its capital base. Considering the stock has delivered 27% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

EDIMAX Technology does have some risks, we noticed 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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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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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