Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. That's why when we briefly looked at Arlitech Electronic's (GTSM:6432) ROCE trend, we were pretty happy with what we saw.
Return On Capital Employed (ROCE): What is it?
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 Arlitech Electronic is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = NT$96m ÷ (NT$1.1b - NT$327m) (Based on the trailing twelve months to September 2020).
So, Arlitech Electronic has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 10% it's much better.
See our latest analysis for Arlitech Electronic
Historical performance is a great place to start when researching a stock so above you can see the gauge for Arlitech Electronic's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Arlitech Electronic, check out these free graphs here.
So How Is Arlitech Electronic's ROCE Trending?
While the current returns on capital are decent, they haven't changed much. The company has employed 70% more capital in the last five years, and the returns on that capital have remained stable at 13%. Since 13% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
The Bottom Line On Arlitech Electronic's ROCE
The main thing to remember is that Arlitech Electronic has proven its ability to continually reinvest at respectable rates of return. And the stock has followed suit returning a meaningful 52% to shareholders over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
One more thing: We've identified 4 warning signs with Arlitech Electronic (at least 1 which shouldn't be ignored) , and understanding them would certainly be useful.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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Should We Be Excited About The Trends Of Returns At Arlitech Electronic (GTSM:6432)? - Simply Wall St
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