Optimax Technology's (TPE:3051) Returns On Capital Not Reflecting Well On The Business

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. And from a first read, things don't look too good at Optimax Technology (TPE:3051), so let's see why.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Optimax Technology, this is the formula:

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

0.016 = NT$118m ÷ (NT$8.8b - NT$1.5b) (Based on the trailing twelve months to December 2020).

So, Optimax Technology has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 10%.

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

What The Trend Of ROCE Can Tell Us

The trend of returns that Optimax Technology is generating are raising some concerns. The company used to generate 3.5% on its capital five years ago but it has since fallen noticeably. In addition to that, Optimax Technology is now employing 20% less capital than it was five years ago. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.

What We Can Learn From Optimax Technology's ROCE

To see Optimax Technology reducing the capital employed in the business in tandem with diminishing returns, is concerning. Yet despite these concerning fundamentals, the stock has performed strongly with a 86% return over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you want to know some of the risks facing Optimax Technology we've found 4 warning signs (2 are concerning!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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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