Will The ROCE Trend At Jhen Vei Electronic (GTSM:3520) Continue?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Jhen Vei Electronic (GTSM:3520) so let's look a bit deeper.

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. To calculate this metric for Jhen Vei Electronic, this is the formula:

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

0.055 = NT$33m ÷ (NT$903m - NT$302m) (Based on the trailing twelve months to September 2020).

Therefore, Jhen Vei Electronic has an ROCE of 5.5%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 10%.

Check out our latest analysis for Jhen Vei Electronic

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jhen Vei Electronic's ROCE against it's prior returns. If you're interested in investigating Jhen Vei Electronic's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Jhen Vei Electronic Tell Us?

Jhen Vei Electronic has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 5.5%, which is always encouraging. While returns have increased, the amount of capital employed by Jhen Vei Electronic 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.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 33% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

Our Take On Jhen Vei Electronic's ROCE

In summary, we're delighted to see that Jhen Vei Electronic has been able to increase efficiencies and earn higher rates of return on the same amount of capital. However the stock is down a substantial 92% in the last five years so there could be other areas of the business hurting its prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

On a final note, we found 3 warning signs for Jhen Vei Electronic (1 is significant) you should be aware of.

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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