Will Youngtek Electronics' (GTSM:6261) Growth In ROCE Persist?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Youngtek Electronics (GTSM:6261) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Youngtek Electronics is:

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

0.11 = NT$652m ÷ (NT$7.6b - NT$1.5b) (Based on the trailing twelve months to September 2020).

So, Youngtek Electronics has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 10% generated by the Semiconductor industry.

See our latest analysis for Youngtek Electronics

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

The Trend Of ROCE

Youngtek Electronics' ROCE growth is quite impressive. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 22% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Bottom Line

To sum it up, Youngtek Electronics is collecting higher returns from the same amount of capital, and that's impressive. And with a respectable 80% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Youngtek Electronics can keep these trends up, it could have a bright future ahead.

On a separate note, we've found 2 warning signs for Youngtek Electronics you'll probably want to know about.

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