Ta Liang Technology (TWSE:3167) 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? 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. Although, when we looked at Ta Liang Technology (TWSE:3167), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Ta Liang Technology is:

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

0.0076 = NT$25m ÷ (NT$5.1b - NT$1.8b) (Based on the trailing twelve months to September 2024).

Thus, Ta Liang Technology has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Electronic industry average of 7.4%.

See our latest analysis for Ta Liang Technology

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Ta Liang Technology's past further, check out this free graph covering Ta Liang Technology's past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Ta Liang Technology's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 7.7%, but since then they've fallen to 0.8%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Ta Liang Technology. And long term investors must be optimistic going forward because the stock has returned a huge 251% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Ta Liang Technology does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is potentially serious...

While Ta Liang Technology 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.