Here's What To Make Of Everlight Electronics' (TPE:2393) Decelerating Rates Of Return

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Everlight Electronics (TPE:2393) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Everlight Electronics is:

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

0.072 = NT$1.4b ÷ (NT$30b - NT$11b) (Based on the trailing twelve months to December 2020).

Thus, Everlight Electronics has an ROCE of 7.2%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 11%.

See our latest analysis for Everlight Electronics

Above you can see how the current ROCE for Everlight Electronics compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Everlight Electronics.

What Can We Tell From Everlight Electronics' ROCE Trend?

Over the past five years, Everlight Electronics' ROCE has remained relatively flat while the business is using 29% less capital than before. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. In addition to that, since the ROCE doesn't scream "quality" at 7.2%, it's hard to get excited about these developments.

The Key Takeaway

Overall, we're not ecstatic to see Everlight Electronics reducing the amount of capital it employs in the business. And with the stock having returned a mere 40% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One more thing, we've spotted 1 warning sign facing Everlight Electronics that you might find interesting.

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.

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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.
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