The Returns At Greatek Electronics (TPE:2441) Provide Us With Signs Of What's To Come

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Greatek Electronics (TPE:2441) looks decent, right now, so lets see what the trend of returns can tell us.

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

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. Analysts use this formula to calculate it for Greatek Electronics:

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

0.18 = NT$3.2b ÷ (NT$22b - NT$3.3b) (Based on the trailing twelve months to December 2020).

Thus, Greatek Electronics has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 10% it's much better.

Check out our latest analysis for Greatek Electronics

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 want to delve into the historical earnings, revenue and cash flow of Greatek Electronics, check out these free graphs here.

What Does the ROCE Trend For Greatek Electronics Tell Us?

While the returns on capital are good, they haven't moved much. The company has consistently earned 18% for the last five years, and the capital employed within the business has risen 31% in that time. Since 18% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Bottom Line

In the end, Greatek Electronics has proven its ability to adequately reinvest capital at good rates of return. And long term investors would be thrilled with the 142% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

If you want to continue researching Greatek Electronics, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Greatek Electronics may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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