Will Radiant Opto-Electronics (TPE:6176) Repeat Its Return Growth Of The Past?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at the ROCE trend of Radiant Opto-Electronics (TPE:6176) we really liked what we saw.

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. To calculate this metric for Radiant Opto-Electronics, this is the formula:

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

0.26 = NT$7.4b ÷ (NT$57b - NT$28b) (Based on the trailing twelve months to September 2020).

Therefore, Radiant Opto-Electronics has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 10%.

See our latest analysis for Radiant Opto-Electronics

In the above chart we have measured Radiant Opto-Electronics' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Radiant Opto-Electronics here for free.

The Trend Of ROCE

Radiant Opto-Electronics' ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 154% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. 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.

Another thing to note, Radiant Opto-Electronics has a high ratio of current liabilities to total assets of 50%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

In summary, we're delighted to see that Radiant Opto-Electronics has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 170% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to continue researching Radiant Opto-Electronics, you might be interested to know about the 2 warning signs that our analysis has discovered.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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