What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we’ve noticed some promising trends at Taitron Components (NASDAQ:TAIT) so let’s look a bit deeper.
Understanding Return On Capital Employed (ROCE)
For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Taitron Components is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.039 = US$499k ÷ (US$14m – US$934k) (Based on the trailing twelve months to June 2020).
Therefore, Taitron Components has an ROCE of 3.9%. Ultimately, that’s a low return and it under-performs the Electronic industry average of 10%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Taitron Components’ ROCE against it’s prior returns. If you want to delve into the historical earnings, revenue and cash flow of Taitron Components, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
Like most people, we’re pleased that Taitron Components is now generating some pretax earnings. The company was generating losses five years ago, but now it’s turned around, earning 3.9% which is no doubt a relief for some early shareholders. In regards to capital employed, Taitron Components is using 22% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Taitron Components could be selling under-performing assets since the ROCE is improving.
The Key Takeaway
In the end, Taitron Components has proven it’s capital allocation skills are good with those higher returns from less amount of capital. Since the stock has returned a staggering 227% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it’s worth looking further into this stock because if Taitron Components can keep these trends up, it could have a bright future ahead.
On a separate note, we’ve found 4 warning signs for Taitron Components you’ll probably want to know about.
While Taitron Components isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
When trading Taitron Components or any other investment, use the platform considered by many to be the Professional’s Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account.
This article by Simply Wall St is general in nature. 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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Discounted cash flow calculation for every stock
Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.