Some Investors May Be Worried About Nidec Chaun-Choung Technology's (TWSE:6230) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Nidec Chaun-Choung Technology (TWSE:6230) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Nidec Chaun-Choung Technology, this is the formula:

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

0.14 = NT$1.0b ÷ (NT$11b - NT$4.1b) (Based on the trailing twelve months to September 2023).

Therefore, Nidec Chaun-Choung Technology has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 8.0% generated by the Electronic industry.

View our latest analysis for Nidec Chaun-Choung Technology

Above you can see how the current ROCE for Nidec Chaun-Choung Technology 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 Nidec Chaun-Choung Technology for free.

What Does the ROCE Trend For Nidec Chaun-Choung Technology Tell Us?

On the surface, the trend of ROCE at Nidec Chaun-Choung Technology doesn't inspire confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 14%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

In summary, Nidec Chaun-Choung Technology is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly, the stock has only gained 40% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One more thing, we've spotted 2 warning signs facing Nidec Chaun-Choung Technology that you might find interesting.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.