Compeq Manufacturing (TWSE:2313) Could Be Struggling To Allocate Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Compeq Manufacturing (TWSE:2313) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Compeq Manufacturing:

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

0.11 = NT$6.1b ÷ (NT$81b - NT$26b) (Based on the trailing twelve months to September 2023).

So, Compeq Manufacturing has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 8.0% generated by the Electronic industry.

Check out our latest analysis for Compeq Manufacturing

In the above chart we have measured Compeq Manufacturing'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 analyst report for Compeq Manufacturing .

What The Trend Of ROCE Can Tell Us

In terms of Compeq Manufacturing's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 11% from 14% 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 may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

To conclude, we've found that Compeq Manufacturing is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 345% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you'd like to know about the risks facing Compeq Manufacturing, we've discovered 2 warning signs that you should be aware of.

While Compeq Manufacturing 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.