Is Optivision Technology (GTSM:3666) A Future Multi-bagger?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. So when we looked at Optivision Technology (GTSM:3666) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

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 Optivision Technology, this is the formula:

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

0.096 = NT$80m ÷ (NT$1.5b - NT$686m) (Based on the trailing twelve months to September 2020).

Therefore, Optivision Technology has an ROCE of 9.6%. On its own, that's a low figure but it's around the 11% average generated by the Semiconductor industry.

See our latest analysis for Optivision Technology

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Optivision Technology's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Optivision Technology Tell Us?

We're delighted to see that Optivision Technology is reaping rewards from its investments and has now broken into profitability. The company now earns 9.6% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 45% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

The Key Takeaway

As discussed above, Optivision Technology appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a staggering 108% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Optivision Technology can keep these trends up, it could have a bright future ahead.

If you'd like to know more about Optivision Technology, we've spotted 3 warning signs, and 1 of them is a bit concerning.

While Optivision Technology 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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