Here’s What’s Happening With Returns At APAC Opto Electronics (GTSM:4908)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in APAC Opto Electronics' (GTSM:4908) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for APAC Opto Electronics:

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

0.12 = NT$178m ÷ (NT$1.7b - NT$148m) (Based on the trailing twelve months to September 2020).

So, APAC Opto Electronics has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Electronic industry average of 11%.

Check out our latest analysis for APAC Opto 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 APAC Opto Electronics' past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

The trends we've noticed at APAC Opto Electronics are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 12%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 30%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

Our Take On APAC Opto Electronics' ROCE

To sum it up, APAC Opto Electronics has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 65% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

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

While APAC Opto Electronics isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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