Will Hotron Precision Electronic IndustrialLtd's (GTSM:3092) Growth In ROCE Persist?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Hotron Precision Electronic IndustrialLtd (GTSM:3092) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Hotron Precision Electronic IndustrialLtd, this is the formula:

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

0.13 = NT$330m ÷ (NT$3.9b - NT$1.4b) (Based on the trailing twelve months to September 2020).

So, Hotron Precision Electronic IndustrialLtd has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 7.3% generated by the Electrical industry.

Check out our latest analysis for Hotron Precision Electronic IndustrialLtd

Above you can see how the current ROCE for Hotron Precision Electronic IndustrialLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

The trends we've noticed at Hotron Precision Electronic IndustrialLtd are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 13%. Basically the business is earning more per dollar of capital invested and in addition to that, 66% more capital is being employed now too. So we're very much inspired by what we're seeing at Hotron Precision Electronic IndustrialLtd thanks to its ability to profitably reinvest capital.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Hotron Precision Electronic IndustrialLtd has. And a remarkable 667% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you want to continue researching Hotron Precision Electronic IndustrialLtd, you might be interested to know about the 4 warning signs that our analysis has discovered.

While Hotron Precision Electronic IndustrialLtd 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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