Should You Be Impressed By Taliang Technology's (TPE:3167) Returns on Capital?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. Although, when we looked at Taliang Technology (TPE:3167), it didn't seem to tick all of these boxes.

Understanding 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 Taliang Technology, this is the formula:

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

0.08 = NT$202m ÷ (NT$4.5b - NT$2.0b) (Based on the trailing twelve months to September 2020).

Therefore, Taliang Technology has an ROCE of 8.0%. Ultimately, that's a low return and it under-performs the Electronic industry average of 11%.

See our latest analysis for Taliang Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Taliang Technology's ROCE against it's prior returns. If you're interested in investigating Taliang Technology's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Taliang Technology, we didn't gain much confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 8.0%. However it looks like Taliang Technology might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a separate but related note, it's important to know that Taliang Technology has a current liabilities to total assets ratio of 44%, 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.

What We Can Learn From Taliang Technology's ROCE

Bringing it all together, while we're somewhat encouraged by Taliang Technology's reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 118% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Like most companies, Taliang Technology does come with some risks, and we've found 2 warning signs that you should be aware of.

While Taliang 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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