There Are Reasons To Feel Uneasy About Hiwin Mikrosystem's (TWSE:4576) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Although, when we looked at Hiwin Mikrosystem (TWSE:4576), 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. Analysts use this formula to calculate it for Hiwin Mikrosystem:

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

0.0053 = NT$26m ÷ (NT$6.2b - NT$1.2b) (Based on the trailing twelve months to December 2023).

So, Hiwin Mikrosystem has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 6.8%.

Check out our latest analysis for Hiwin Mikrosystem

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

So How Is Hiwin Mikrosystem's ROCE Trending?

When we looked at the ROCE trend at Hiwin Mikrosystem, we didn't gain much confidence. Around five years ago the returns on capital were 7.5%, but since then they've fallen to 0.5%. And considering revenue has dropped while employing more capital, we'd be cautious. 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 Hiwin Mikrosystem's ROCE

In summary, we're somewhat concerned by Hiwin Mikrosystem's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 32% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Like most companies, Hiwin Mikrosystem does come with some risks, and we've found 2 warning signs that you should be aware of.

While Hiwin Mikrosystem 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.