What Can The Trends At Bright LED Electronics (TPE:3031) Tell Us About Their Returns?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Bright LED Electronics (TPE:3031) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Bright LED Electronics is:

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

0.036 = NT$98m ÷ (NT$3.2b - NT$482m) (Based on the trailing twelve months to September 2020).

So, Bright LED Electronics has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 11%.

See our latest analysis for Bright LED 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're interested in investigating Bright LED Electronics' past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

Bright LED Electronics has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 3.6% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Bright LED Electronics has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

What We Can Learn From Bright LED Electronics' ROCE

To bring it all together, Bright LED Electronics has done well to increase the returns it's generating from its capital employed. Since the stock has returned a solid 96% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing to note, we've identified 2 warning signs with Bright LED Electronics and understanding them should be part of your investment process.

While Bright LED 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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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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