Can Scientech (TPE:3583) Continue To Grow Its Returns On Capital?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. With that in mind, we've noticed some promising trends at Scientech (TPE:3583) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on Scientech is:

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

0.12 = NT$351m ÷ (NT$4.3b - NT$1.3b) (Based on the trailing twelve months to September 2020).

Thus, Scientech has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 10% generated by the Electronic industry.

See our latest analysis for Scientech

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

So How Is Scientech's ROCE Trending?

The trends we've noticed at Scientech are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 12%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 34%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line

All in all, it's terrific to see that Scientech is reaping the rewards from prior investments and is growing its capital base. Astute investors may have an opportunity here because the stock has declined 12% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you want to continue researching Scientech, you might be interested to know about the 2 warning signs that our analysis has discovered.

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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