Will the Promising Trends At Ability Opto-Electronics TechnologyLtd (GTSM:3362) Continue?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. 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 Ability Opto-Electronics TechnologyLtd (GTSM:3362) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Ability Opto-Electronics TechnologyLtd, this is the formula:

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).

Thus, Ability Opto-Electronics TechnologyLtd has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Electronic industry average of 11%.

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

What Can We Tell From Ability Opto-Electronics TechnologyLtd's ROCE Trend?

The fact that Ability Opto-Electronics TechnologyLtd is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 2.3% on its capital. 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 tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

What We Can Learn From Ability Opto-Electronics TechnologyLtd's ROCE

Overall, Ability Opto-Electronics TechnologyLtd gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Since the stock has returned a staggering 441% to shareholders over the last five years, it looks like investors are recognizing 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.

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

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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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