What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. So when we looked at Acer (TPE:2353) and its trend of ROCE, we really liked what we saw.
What is Return On Capital Employed (ROCE)?
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Acer, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.061 = NT$4.1b ÷ (NT$161b – NT$94b) (Based on the trailing twelve months to June 2020).
Therefore, Acer has an ROCE of 6.1%. In absolute terms, that’s a low return and it also under-performs the Tech industry average of 11%.
Above you can see how the current ROCE for Acer 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 Acer.
The Trend Of ROCE
Acer has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 36% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it’s worth exploring what management has said about growth plans going forward.
On a separate but related note, it’s important to know that Acer has a current liabilities to total assets ratio of 58%, which we’d consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it’s not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line On Acer’s ROCE
In summary, we’re delighted to see that Acer has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 112% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it’s worth researching the company further to see if these trends are likely to persist.
If you’d like to know about the risks facing Acer, we’ve discovered 2 warning signs that you should be aware of.
While Acer isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
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