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Alpha Networks Inc.’s (TPE:3380) Investment Returns Are Lagging Its Industry – Simply Wall St

Today we’ll look at Alpha Networks Inc. (TPE:3380) and reflect on its potential as an investment. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

First up, we’ll look at what ROCE is and how we calculate it. Second, we’ll look at its ROCE compared to similar companies. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that ‘one dollar invested in the company generates value of more than one dollar’.

So, How Do We Calculate ROCE?

The formula for calculating the return on capital employed is:

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

Or for Alpha Networks:

0.015 = NT$232m ÷ (NT$25b – NT$9.6b) (Based on the trailing twelve months to December 2019.)

Therefore, Alpha Networks has an ROCE of 1.5%.

See our latest analysis for Alpha Networks

Does Alpha Networks Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. We can see Alpha Networks’s ROCE is meaningfully below the Communications industry average of 6.2%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Putting aside Alpha Networks’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.

Alpha Networks’s current ROCE of 1.5% is lower than 3 years ago, when the company reported a 7.2% ROCE. So investors might consider if it has had issues recently. You can see in the image below how Alpha Networks’s ROCE compares to its industry. Click to see more on past growth.

TSEC:3380 Past Revenue and Net Income April 6th 2020
TSEC:3380 Past Revenue and Net Income April 6th 2020

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Alpha Networks’s Current Liabilities And Their Impact On Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Alpha Networks has current liabilities of NT$9.6b and total assets of NT$25b. As a result, its current liabilities are equal to approximately 38% of its total assets. Alpha Networks has a medium level of current liabilities (boosting the ROCE somewhat), and a low ROCE.

Our Take On Alpha Networks’s ROCE

There are likely better investments out there. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.

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