Capital Investment Trends At Test Research (TWSE:3030) Look Strong

Simply Wall St · 10/17 22:22

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. With that in mind, the ROCE of Test Research (TWSE:3030) looks attractive right now, so lets see what the trend of returns can tell us.

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 Test Research is:

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

0.22 = NT$1.7b ÷ (NT$10b - NT$2.8b) (Based on the trailing twelve months to June 2024).

So, Test Research has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Electronic industry average of 6.8%.

View our latest analysis for Test Research

roce
TWSE:3030 Return on Capital Employed October 17th 2024

Historical performance is a great place to start when researching a stock so above you can see the gauge for Test Research's ROCE against it's prior returns. If you're interested in investigating Test Research's past further, check out this free graph covering Test Research's past earnings, revenue and cash flow.

So How Is Test Research's ROCE Trending?

Test Research deserves to be commended in regards to it's returns. Over the past five years, ROCE has remained relatively flat at around 22% and the business has deployed 46% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

Our Take On Test Research's ROCE

In short, we'd argue Test Research has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. On top of that, the stock has rewarded shareholders with a remarkable 270% return to those who've held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

On a final note, we've found 2 warning signs for Test Research that we think you should be aware of.

Test Research is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.