Capital Allocation Trends At MiTAC Holdings (TWSE:3706) Aren't Ideal

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at MiTAC Holdings (TWSE:3706) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for MiTAC Holdings:

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

0.0036 = NT$249m ÷ (NT$88b - NT$19b) (Based on the trailing twelve months to March 2024).

So, MiTAC Holdings has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Tech industry average of 11%.

View our latest analysis for MiTAC Holdings

Above you can see how the current ROCE for MiTAC Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering MiTAC Holdings for free.

How Are Returns Trending?

In terms of MiTAC Holdings' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 0.5%, but since then they've fallen to 0.4%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On MiTAC Holdings' ROCE

We're a bit apprehensive about MiTAC Holdings because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Since the stock has skyrocketed 134% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One more thing, we've spotted 2 warning signs facing MiTAC Holdings that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com