Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Ergo, when we looked at the ROCE trends at Nidec Chaun-Choung Technology (TPE:6230), we liked what we saw.
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. The formula for this calculation on Nidec Chaun-Choung Technology is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.21 = NT$1.1b ÷ (NT$8.7b – NT$3.6b) (Based on the trailing twelve months to December 2020).
Therefore, Nidec Chaun-Choung Technology has an ROCE of 21%. In absolute terms that’s a great return and it’s even better than the Electronic industry average of 10%.
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 to see what analysts are forecasting going forward, you should check out our free report for Nidec Chaun-Choung Technology.
What Does the ROCE Trend For Nidec Chaun-Choung Technology Tell Us?
We’d be pretty happy with returns on capital like Nidec Chaun-Choung Technology. The company has consistently earned 21% for the last five years, and the capital employed within the business has risen 35% in that time. Now considering ROCE is an attractive 21%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Nidec Chaun-Choung Technology can keep this up, we’d be very optimistic about its future.
On a separate but related note, it’s important to know that Nidec Chaun-Choung Technology has a current liabilities to total assets ratio of 42%, which we’d consider pretty high. 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. While it’s not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Key Takeaway
Nidec Chaun-Choung Technology has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we’re thrilled about. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
One more thing, we’ve spotted 1 warning sign facing Nidec Chaun-Choung Technology that you might find interesting.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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