Returns On Capital At Walsin Technology (TWSE:2492) Paint A Concerning Picture

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Walsin Technology (TWSE:2492), we don't think it's current trends fit the mold of a multi-bagger.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Walsin Technology, this is the formula:

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

0.03 = NT$2.1b ÷ (NT$97b - NT$27b) (Based on the trailing twelve months to March 2024).

Therefore, Walsin Technology has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 6.6%.

See our latest analysis for Walsin Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Walsin Technology's ROCE against it's prior returns. If you're interested in investigating Walsin Technology's past further, check out this free graph covering Walsin Technology's past earnings, revenue and cash flow.

What Does the ROCE Trend For Walsin Technology Tell Us?

On the surface, the trend of ROCE at Walsin Technology doesn't inspire confidence. Around five years ago the returns on capital were 57%, but since then they've fallen to 3.0%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

The Bottom Line

In summary, Walsin Technology is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 16% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Walsin Technology does have some risks, we noticed 2 warning signs (and 1 which is concerning) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.