Returns On Capital Are A Standout For Quanta Computer (TWSE:2382)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. With that in mind, the ROCE of Quanta Computer (TWSE:2382) looks great, so lets see what the trend can tell us.

Return On Capital Employed (ROCE): What Is It?

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 Quanta Computer is:

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

0.21 = NT$44b ÷ (NT$690b - NT$483b) (Based on the trailing twelve months to December 2023).

Thus, Quanta Computer has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Tech industry average of 11%.

See our latest analysis for Quanta Computer

Above you can see how the current ROCE for Quanta Computer 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 analyst report for Quanta Computer .

What Can We Tell From Quanta Computer's ROCE Trend?

We like the trends that we're seeing from Quanta Computer. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 21%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 28%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, Quanta Computer's current liabilities are still rather high at 70% 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Quanta Computer's ROCE

To sum it up, Quanta Computer has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 471% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing to note, we've identified 1 warning sign with Quanta Computer and understanding it should be part of your investment process.

Quanta Computer is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.