Can Optimax Technology (TPE:3051) Turn Things Around?

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. In light of that, from a first glance at Optimax Technology (TPE:3051), we've spotted some signs that it could be struggling, so let's investigate.

What is Return On Capital Employed (ROCE)?

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 Optimax Technology:

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

0.017 = NT$122m ÷ (NT$8.6b - NT$1.5b) (Based on the trailing twelve months to September 2020).

Therefore, Optimax Technology has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Electronic industry average of 11%.

See our latest analysis for Optimax Technology

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

What Does the ROCE Trend For Optimax Technology Tell Us?

In terms of Optimax Technology's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 6.1% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Optimax Technology to turn into a multi-bagger.

In Conclusion...

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. In spite of that, the stock has delivered a 24% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Optimax Technology does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are potentially serious...

While Optimax 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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