Can Arcadyan Technology (TPE:3596) 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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. With that in mind, we've noticed some promising trends at Arcadyan Technology (TPE:3596) so let's look a bit deeper.

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

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. To calculate this metric for Arcadyan Technology, this is the formula:

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

0.16 = NT$2.0b ÷ (NT$28b - NT$15b) (Based on the trailing twelve months to September 2020).

Therefore, Arcadyan Technology has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Communications industry average of 9.8% it's much better.

Check out our latest analysis for Arcadyan Technology

In the above chart we have measured Arcadyan Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Arcadyan Technology.

What Does the ROCE Trend For Arcadyan Technology Tell Us?

Investors would be pleased with what's happening at Arcadyan Technology. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 16%. 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 62%. So we're very much inspired by what we're seeing at Arcadyan Technology thanks to its ability to profitably reinvest capital.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 54% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line

All in all, it's terrific to see that Arcadyan Technology is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 246% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Arcadyan Technology does have some risks though, and we've spotted 1 warning sign for Arcadyan Technology that you might be interested in.

While Arcadyan Technology may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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