Perfect Optronics (HKG:8311) Is Doing The Right Things To Multiply Its Share Price

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Perfect Optronics (HKG:8311) and its trend of ROCE, we really liked what we saw.

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 Perfect Optronics is:

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

0.15 = HK$18m ÷ (HK$151m - HK$38m) (Based on the trailing twelve months to September 2022).

Thus, Perfect Optronics has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 7.3% generated by the Electronic industry.

Check out our latest analysis for Perfect Optronics

Historical performance is a great place to start when researching a stock so above you can see the gauge for Perfect Optronics' ROCE against it's prior returns. If you'd like to look at how Perfect Optronics has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Like most people, we're pleased that Perfect Optronics is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 15% on their capital employed. In regards to capital employed, Perfect Optronics is using 65% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Perfect Optronics could be selling under-performing assets since the ROCE is improving.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 25% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

In Conclusion...

In the end, Perfect Optronics has proven it's capital allocation skills are good with those higher returns from less amount of capital. Astute investors may have an opportunity here because the stock has declined 59% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you'd like to know about the risks facing Perfect Optronics, we've discovered 2 warning signs that you should be aware of.

While Perfect Optronics may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.