There Are Reasons To Feel Uneasy About Thinking Electronic Industrial's (TWSE:2428) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 Thinking Electronic Industrial (TWSE:2428) 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. Analysts use this formula to calculate it for Thinking Electronic Industrial:

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

0.12 = NT$1.6b ÷ (NT$15b - NT$1.9b) (Based on the trailing twelve months to March 2024).

Therefore, Thinking Electronic Industrial has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 7.0% it's much better.

Check out our latest analysis for Thinking Electronic Industrial

In the above chart we have measured Thinking Electronic Industrial's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Thinking Electronic Industrial .

How Are Returns Trending?

On the surface, the trend of ROCE at Thinking Electronic Industrial doesn't inspire confidence. Over the last five years, returns on capital have decreased to 12% from 20% five years ago. However it looks like Thinking Electronic Industrial might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Thinking Electronic Industrial's ROCE

In summary, Thinking Electronic Industrial is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 157% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Thinking Electronic Industrial could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 2428 on our platform quite valuable.

While Thinking Electronic Industrial may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.

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