Returns Are Gaining Momentum At TPK Holding (TPE:3673)

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. Speaking of which, we noticed some great changes in TPK Holding's (TPE:3673) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for TPK Holding:

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

0.017 = NT$950m ÷ (NT$84b - NT$29b) (Based on the trailing twelve months to December 2020).

So, TPK Holding has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Electronic industry average of 10%.

Check out our latest analysis for TPK Holding

Above you can see how the current ROCE for TPK Holding compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for TPK Holding.

What Does the ROCE Trend For TPK Holding Tell Us?

TPK Holding has broken into the black (profitability) and we're sure it's a sight for sore eyes. While the business was unprofitable in the past, it's now turned things around and is earning 1.7% on its capital. While returns have increased, the amount of capital employed by TPK Holding has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

On a related note, the company's ratio of current liabilities to total assets has decreased to 35%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

What We Can Learn From TPK Holding's ROCE

To sum it up, TPK Holding is collecting higher returns from the same amount of capital, and that's impressive. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

TPK Holding does have some risks, we noticed 3 warning signs (and 1 which is significant) we think you should know about.

While TPK Holding 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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