If we want to find a title that could multiply over the long term, what are the underlying trends to look for? First, we will want to see a return on capital employed (ROCE) which increases and, on the other hand, a based capital employed. Ultimately, this demonstrates that this is a company that is reinvesting its profits at increasing rates of return. Therefore, when we briefly examined ASM Pacific Technology (HKG: 522) Trend ROCE, we were pretty happy with what we saw.
What is Return on Employee Capital (ROCE)?
For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return), relative to the capital employed in the company. Analysts use this formula to calculate it for ASM Pacific Technology:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.10 = HK $ 1.8 billion ÷ (HK $ 23 billion – HK $ 5.3 billion) (Based on the last twelve months up to March 2021).
Therefore, ASM Pacific Technology has a ROCE of 10%. On its own, this is standard efficiency, but it is far better than the 8.5% generated by the semiconductor industry.
See our latest review for ASM Pacific Technology
In the graph above, we measured ASM Pacific Technology’s past ROCE against its past performance, but the future is arguably more important. If you are interested, you can view analyst forecasts in our free analyst forecast report for the company.
What the ROCE trend can tell us
The ROCE trend doesn’t stand out much, but overall returns are okay. Over the past five years, ROCE has remained relatively stable at around 10% and the company has deployed 66% more capital in its operations. 10% is a pretty standard return, and it’s reassuring knowing that ASM Pacific Technology has always earned that amount. Stable returns in this basic stage can be unattractive, but if they can be sustained over the long term, they often offer nice rewards for shareholders.
The bottom line
The main thing to remember is that ASM Pacific Technology has proven its ability to continually reinvest at respectable rates of return. And the stock followed suit, returning 90% to shareholders over the past five years. So while the positive underlying trends can be explained by investors, we still believe this stock is worth looking into.
Like most businesses, ASM Pacific Technology comes with certain risks, and we have found 3 warning signs that you should be aware of.
For those who like to invest in solid companies, Check it out free list of companies with strong balance sheets and high returns on equity.
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