Will The ROCE Trend At Brightek Optoelectronic (GTSM:5244) Continue?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 on that note, Brightek Optoelectronic (GTSM:5244) looks quite promising in regards to its trends of return on capital.

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. Analysts use this formula to calculate it for Brightek Optoelectronic:

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

0.17 = NT$165m ÷ (NT$1.3b - NT$330m) (Based on the trailing twelve months to June 2020).

So, Brightek Optoelectronic has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 10% generated by the Semiconductor industry.

Check out our latest analysis for Brightek Optoelectronic

Historical performance is a great place to start when researching a stock so above you can see the gauge for Brightek Optoelectronic's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Brightek Optoelectronic, check out these free graphs here.

The Trend Of ROCE

Brightek Optoelectronic has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 539% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

The Bottom Line On Brightek Optoelectronic's ROCE

As discussed above, Brightek Optoelectronic appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing to note, we've identified 3 warning signs with Brightek Optoelectronic and understanding them should be part of your investment process.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

If you decide to trade Brightek Optoelectronic, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.