There's Been No Shortage Of Growth Recently For Hua Jung ComponentsLtd's (GTSM:5328) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 Hua Jung ComponentsLtd's (GTSM:5328) returns on capital, so let's have a look.

Understanding 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 Hua Jung ComponentsLtd:

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

0.015 = NT$26m ÷ (NT$2.2b - NT$535m) (Based on the trailing twelve months to December 2020).

Thus, Hua Jung ComponentsLtd has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Electronic industry average of 10%.

See our latest analysis for Hua Jung ComponentsLtd

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

What The Trend Of ROCE Can Tell Us

While there are companies with higher returns on capital out there, we still find the trend at Hua Jung ComponentsLtd promising. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 24% in that same time. 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.

What We Can Learn From Hua Jung ComponentsLtd's ROCE

In summary, we're delighted to see that Hua Jung ComponentsLtd has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Hua Jung ComponentsLtd (of which 1 can't be ignored!) that you should know about.

While Hua Jung ComponentsLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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