Returns On Capital Signal Tricky Times Ahead For Taiwan Surface Mounting Technology (TWSE:6278)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Having said that, from a first glance at Taiwan Surface Mounting Technology (TWSE:6278) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Taiwan Surface Mounting Technology, this is the formula:

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

0.11 = NT$3.0b ÷ (NT$51b - NT$25b) (Based on the trailing twelve months to June 2024).

Thus, Taiwan Surface Mounting Technology has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 6.8% generated by the Electronic industry.

View our latest analysis for Taiwan Surface Mounting Technology

In the above chart we have measured Taiwan Surface Mounting Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Taiwan Surface Mounting Technology .

How Are Returns Trending?

When we looked at the ROCE trend at Taiwan Surface Mounting Technology, we didn't gain much confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 11%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Taiwan Surface Mounting Technology's current liabilities are still rather high at 49% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Taiwan Surface Mounting Technology's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Taiwan Surface Mounting Technology have fallen, meanwhile the business is employing more capital than it was five years ago. Yet despite these concerning fundamentals, the stock has performed strongly with a 48% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Taiwan Surface Mounting Technology does have some risks though, and we've spotted 1 warning sign for Taiwan Surface Mounting Technology that you might be interested in.

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.