Has Vivotek (TPE:3454) Got What It Takes To Become A Multi-Bagger?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. In light of that, when we looked at Vivotek (TPE:3454) and its ROCE trend, we weren't exactly thrilled.

Understanding 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 Vivotek is:

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

0.078 = NT$253m ÷ (NT$4.5b - NT$1.2b) (Based on the trailing twelve months to September 2020).

Therefore, Vivotek has an ROCE of 7.8%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 10%.

See our latest analysis for Vivotek

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

How Are Returns Trending?

In terms of Vivotek's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 7.8% from 17% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for Vivotek have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 41% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a final note, we found 2 warning signs for Vivotek (1 is potentially serious) you should be aware of.

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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