What Can The Trends At Ability Opto-Electronics TechnologyLtd (GTSM:3362) Tell Us About Their Returns?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Ability Opto-Electronics TechnologyLtd's (GTSM:3362) returns on capital, so let's have a look.

Understanding 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 Ability Opto-Electronics TechnologyLtd is:

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

0.023 = NT$64m ÷ (NT$4.0b - NT$1.2b) (Based on the trailing twelve months to September 2020).

So, Ability Opto-Electronics TechnologyLtd has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 10%.

View our latest analysis for Ability Opto-Electronics TechnologyLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ability Opto-Electronics TechnologyLtd's ROCE against it's prior returns. If you'd like to look at how Ability Opto-Electronics TechnologyLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

The fact that Ability Opto-Electronics TechnologyLtd is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 2.3% which is a sight for sore eyes. Not only that, but the company is utilizing 101% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

The Bottom Line

To the delight of most shareholders, Ability Opto-Electronics TechnologyLtd has now broken into profitability. Since the stock has returned a staggering 194% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.

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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