Returns At Chenming Electronic Tech (TWSE:3013) Are On The Way Up

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Chenming Electronic Tech (TWSE:3013) and its trend of ROCE, we really liked what we saw.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Chenming Electronic Tech:

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

0.14 = NT$647m ÷ (NT$7.8b - NT$3.3b) (Based on the trailing twelve months to September 2024).

Therefore, Chenming Electronic Tech has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Tech industry average of 12%.

Check out our latest analysis for Chenming Electronic Tech

In the above chart we have measured Chenming Electronic Tech'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 Chenming Electronic Tech .

So How Is Chenming Electronic Tech's ROCE Trending?

Chenming Electronic Tech is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 14%. The amount of capital employed has increased too, by 62%. So we're very much inspired by what we're seeing at Chenming Electronic Tech thanks to its ability to profitably reinvest capital.

Another thing to note, Chenming Electronic Tech has a high ratio of current liabilities to total assets of 42%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Chenming Electronic Tech's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Chenming Electronic Tech has. And a remarkable 951% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Chenming Electronic Tech can keep these trends up, it could have a bright future ahead.

One more thing, we've spotted 1 warning sign facing Chenming Electronic Tech that you might find interesting.

While Chenming Electronic Tech 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.