Capital Allocation Trends At Taiwan Cogeneration (TWSE:8926) Aren't Ideal

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Although, when we looked at Taiwan Cogeneration (TWSE:8926), it didn't seem to tick all of these boxes.

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 Taiwan Cogeneration is:

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

0.001 = NT$21m ÷ (NT$27b - NT$6.0b) (Based on the trailing twelve months to March 2024).

So, Taiwan Cogeneration has an ROCE of 0.1%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 6.3%.

See our latest analysis for Taiwan Cogeneration

Historical performance is a great place to start when researching a stock so above you can see the gauge for Taiwan Cogeneration's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Taiwan Cogeneration.

What Can We Tell From Taiwan Cogeneration's ROCE Trend?

In terms of Taiwan Cogeneration's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 1.3%, but since then they've fallen to 0.1%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 23%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 0.1%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Bottom Line On Taiwan Cogeneration's ROCE

While returns have fallen for Taiwan Cogeneration in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 135% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you'd like to know more about Taiwan Cogeneration, we've spotted 2 warning signs, and 1 of them is significant.

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.

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