Here's What's Concerning About Chang Wah Electromaterials' (TWSE:8070) 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? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Chang Wah Electromaterials (TWSE:8070) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Chang Wah Electromaterials is:

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

0.065 = NT$1.7b ÷ (NT$36b - NT$9.9b) (Based on the trailing twelve months to December 2023).

Thus, Chang Wah Electromaterials has an ROCE of 6.5%. In absolute terms, that's a low return but it's around the Electronic industry average of 6.6%.

See our latest analysis for Chang Wah Electromaterials

Historical performance is a great place to start when researching a stock so above you can see the gauge for Chang Wah Electromaterials' ROCE against it's prior returns. If you'd like to look at how Chang Wah Electromaterials has performed in the past in other metrics, you can view this free graph of Chang Wah Electromaterials' past earnings, revenue and cash flow.

What Does the ROCE Trend For Chang Wah Electromaterials Tell Us?

On the surface, the trend of ROCE at Chang Wah Electromaterials doesn't inspire confidence. To be more specific, ROCE has fallen from 13% over the last five years. 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.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Chang Wah Electromaterials have fallen, meanwhile the business is employing more capital than it was five years ago. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 249%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know about the risks facing Chang Wah Electromaterials, we've discovered 1 warning sign that you should be aware of.

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.