Should You Be Impressed By Sercomm's (TPE:5388) Returns on Capital?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Sercomm (TPE:5388) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Sercomm is:

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

0.088 = NT$999m ÷ (NT$28b - NT$17b) (Based on the trailing twelve months to September 2020).

So, Sercomm has an ROCE of 8.8%. On its own, that's a low figure but it's around the 9.8% average generated by the Communications industry.

See our latest analysis for Sercomm

Above you can see how the current ROCE for Sercomm 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 Sercomm here for free.

What Does the ROCE Trend For Sercomm Tell Us?

When we looked at the ROCE trend at Sercomm, we didn't gain much confidence. To be more specific, ROCE has fallen from 21% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Sercomm has done well to pay down its current liabilities to 59% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

Our Take On Sercomm's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Sercomm. In light of this, the stock has only gained 21% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

If you want to know some of the risks facing Sercomm we've found 4 warning signs (2 are significant!) that you should be aware of before investing here.

While Sercomm 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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