Taiwan Semiconductor Manufacturing (NYSE: TSM) capital allocation points to better future returns
This article originally appeared on Simply Wall Street News.
Actions of Semiconductor manufacturing in Taiwan ( NYSE: TSM ) reacted well to the third quarter results released last week. But the share price remains in an overall downtrend that started in February.
Highlights of third quarter results:
Revenue of $ 14.88 billion, $ 140 million ahead of consensus and up 22.5% year-over-year.
GAAP EPS of $ 1.08, $ 0.05 ahead of consensus and up 20% year-on-year.
Gross and operating margins above consensus and improved compared to Q2.
TSMC has underperformed the semiconductor market and industry by up to 20% since February, and the stock price has only risen 6% since the start of the year. Many semiconductor companies have struggled this year. This is partly due to the shortage of chips affecting customers and partly due to the strong price performance in 2020. In the case of TSMC, the share price rose 85% in 2020 and 273% during the year. of the last 5 years (excluding dividends).
The TSMC share price could also move sideways as the outlook does not stand out from the industry or the market in general. The following chart illustrates the earnings and revenue growth prospects for TSM, the semiconductor industry, and the US stock market.
With expectations broadly in line with the industry and the market, there does not appear to be any reason to take the risk currently associated with chip stocks. TSMC does not appear overvalued, but neither does it look cheap compared to the expected growth rate.
Although the immediate future does not look very exciting, we can see how much the company is allocating capital. This will give us an idea of TSMC’s ability to increase its profits in the future. To do this, we can calculate the Return on Capital Employed (ROCE).
What is Return on Employee Capital (ROCE)?
If you’ve never worked with ROCE before, it measures the “return” (profit before taxes) that a business generates on capital employed in its business. The formula for this calculation on Taiwan Semiconductor Manufacturing is:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.23 = NT $ 625 billion ÷ (NT 3.3 tons – NT $ 656 billion) (Based on the last twelve months up to September 2021) .
Therefore, Taiwan Semiconductor Manufacturing has a ROCE of 23% . It’s a fantastic return and not only that, it exceeds the 13% average earned by companies in a similar industry. For the context, among the major semiconductor producers, only Qualcomm ( NASDAQ: QCOM ), Texas instruments ( NASDAQ: TXN ), and Advanced Micro Devices, Inc. ( NASDAQ: AMD ), have a higher ROCE.
In the graph above, we measured Taiwan Semiconductor Manufacturing’s past ROCE against its past performance, but arguably the future is more important.
So, how is TSMC’s ROCE evolving?
We would rather be satisfied with a return on capital like Taiwan Semiconductor Manufacturing. The company has steadily gained 23% over the past five years and the capital employed within the company has increased by 83% during this period. Now that the ROCE is attractive at 23%, this combination is actually quite attractive because it means that the company can constantly put money to work and generate those high returns.
Our opinion on TSMC’s ROCE
TSMC’s ROCE is impressive both in absolute terms and compared to its peers. This bodes well for future growth prospects. But capital allocation is only one aspect of a business to watch. Our final analysis for Taiwan Semiconductor Manufacturing covers other important information such as valuation, past performance, ownership and key risks to be aware of.
If you want to research other stocks that have generated high returns, check out this free article. list of stocks with strong balance sheets that also generate high returns on equity.
Simply Wall St analyst Richard Bowman and Simply Wall St have no positions in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents.
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