Returns On Capital At Adlink Technology (TWSE:6166) Paint A Concerning Picture

Did you know there are some financial metrics that can provide clues of a potential 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Adlink Technology (TWSE:6166), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Adlink Technology:

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

0.0074 = NT$60m ÷ (NT$13b - NT$4.4b) (Based on the trailing twelve months to March 2024).

So, Adlink Technology has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Tech industry average of 11%.

See our latest analysis for Adlink Technology

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

How Are Returns Trending?

When we looked at the ROCE trend at Adlink Technology, we didn't gain much confidence. Around five years ago the returns on capital were 9.1%, but since then they've fallen to 0.7%. 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.

What We Can Learn From Adlink Technology's ROCE

We're a bit apprehensive about Adlink Technology because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Yet despite these concerning fundamentals, the stock has performed strongly with a 52% return over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Adlink Technology (of which 1 can't be ignored!) that you should know about.

While Adlink 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.

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