We're Watching These Trends At Primax Electronics (TPE:4915)

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. With that in mind, the ROCE of Primax Electronics (TPE:4915) looks decent, right now, so lets see what the trend of returns can tell us.

What is 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. Analysts use this formula to calculate it for Primax Electronics:

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

0.13 = NT$2.4b ÷ (NT$50b - NT$31b) (Based on the trailing twelve months to September 2020).

Therefore, Primax Electronics has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Tech industry average of 12%.

View our latest analysis for Primax Electronics

Above you can see how the current ROCE for Primax Electronics compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Primax Electronics here for free.

What Can We Tell From Primax Electronics' ROCE Trend?

While the returns on capital are good, they haven't moved much. The company has employed 27% more capital in the last five years, and the returns on that capital have remained stable at 13%. Since 13% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

On a side note, Primax Electronics' current liabilities are still rather high at 62% of total assets. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Primax Electronics' ROCE

The main thing to remember is that Primax Electronics has proven its ability to continually reinvest at respectable rates of return. And the stock has followed suit returning a meaningful 43% to shareholders over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

Primax Electronics does have some risks though, and we've spotted 2 warning signs for Primax Electronics that you might be interested in.

While Primax Electronics 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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