What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at AAEON Technology (TPE:6579) and its ROCE trend, we weren't exactly thrilled.
Understanding 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. The formula for this calculation on AAEON Technology is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.073 = NT$621m ÷ (NT$9.6b - NT$1.1b) (Based on the trailing twelve months to December 2020).
Therefore, AAEON Technology has an ROCE of 7.3%. In absolute terms, that's a low return and it also under-performs the Tech industry average of 12%.
View our latest analysis for AAEON Technology
Historical performance is a great place to start when researching a stock so above you can see the gauge for AAEON Technology's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of AAEON Technology, check out these free graphs here.
How Are Returns Trending?
When we looked at the ROCE trend at AAEON Technology, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.3% from 15% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
On a related note, AAEON Technology has decreased its current liabilities to 11% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
The Bottom Line
To conclude, we've found that AAEON Technology is reinvesting in the business, but returns have been falling. Unsurprisingly then, the total return to shareholders over the last three years has been flat. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
Like most companies, AAEON Technology does come with some risks, and we've found 1 warning sign that you should be aware of.
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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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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About TWSE:6579
AAEON Technology
Designs, manufactures, and sells industrial computers and peripherals.
Excellent balance sheet with questionable track record.
