What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we’d like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at MediaTek (TPE:2454), it didn’t seem to tick all of these boxes.
Understanding 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. The formula for this calculation on MediaTek is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.078 = NT$26b ÷ (NT$483b – NT$143b) (Based on the trailing twelve months to June 2020).
Thus, MediaTek has an ROCE of 7.8%. In absolute terms, that’s a low return and it also under-performs the Semiconductor industry average of 11%.
See our latest analysis for MediaTek
In the above chart we have measured MediaTek’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like to see what analysts are forecasting going forward, you should check out our free report for MediaTek.
How Are Returns Trending?
When we looked at the ROCE trend at MediaTek, we didn’t gain much confidence. To be more specific, ROCE has fallen from 17% over the last five years. However it looks like MediaTek might be reinvesting for long term growth because while capital employed has increased, the company’s sales haven’t changed much in the last 12 months. It’s worth keeping an eye on the company’s earnings from here on to see if these investments do end up contributing to the bottom line.
What We Can Learn From MediaTek’s ROCE
In summary, MediaTek is reinvesting funds back into the business for growth but unfortunately it looks like sales haven’t increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 162% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn’t get our hopes up too high.
MediaTek could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.
While MediaTek 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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Our Take On The Returns On Capital At MediaTek (TPE:2454) - Simply Wall St
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