Will The ROCE Trend At Yufo Electronics (GTSM:6194) Continue?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Yufo Electronics (GTSM:6194) 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. The formula for this calculation on Yufo Electronics is:

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

0.12 = NT$223m ÷ (NT$2.2b - NT$378m) (Based on the trailing twelve months to September 2020).

So, Yufo 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 10%.

See our latest analysis for Yufo 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 want to delve into the historical earnings, revenue and cash flow of Yufo Electronics, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Yufo Electronics is reaping rewards from its investments and has now broken into profitability. While the business is profitable now, it used to be incurring losses on invested capital five years ago. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 25%. Yufo Electronics could be selling under-performing assets since the ROCE is improving.

In Conclusion...

In the end, Yufo Electronics has proven it's capital allocation skills are good with those higher returns from less amount of capital. And with a respectable 88% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

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

While Yufo 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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