Arizon RFID Technology (Cayman) (TWSE:6863) Hasn't Managed To Accelerate Its Returns

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over Arizon RFID Technology (Cayman)'s (TWSE:6863) trend of ROCE, we liked what we saw.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Arizon RFID Technology (Cayman), this is the formula:

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

0.11 = NT$656m ÷ (NT$7.4b - NT$1.7b) (Based on the trailing twelve months to June 2024).

So, Arizon RFID Technology (Cayman) has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Communications industry average of 9.3% it's much better.

See our latest analysis for Arizon RFID Technology (Cayman)

In the above chart we have measured Arizon RFID Technology (Cayman)'s prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Arizon RFID Technology (Cayman) .

So How Is Arizon RFID Technology (Cayman)'s ROCE Trending?

While the returns on capital are good, they haven't moved much. The company has employed 72% more capital in the last four years, and the returns on that capital have remained stable at 11%. Since 11% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last four years. This is intriguing because if current liabilities hadn't increased to 23% of total assets, this reported ROCE would probably be less than11% because total capital employed would be higher.The 11% ROCE could be even lower if current liabilities weren't 23% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.

The Bottom Line On Arizon RFID Technology (Cayman)'s ROCE

To sum it up, Arizon RFID Technology (Cayman) has simply been reinvesting capital steadily, at those decent rates of return. And the stock has followed suit returning a meaningful 87% to shareholders over the last year. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Arizon RFID Technology (Cayman) (of which 1 is a bit unpleasant!) that you should know about.

While Arizon RFID Technology (Cayman) may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.