Returns On Capital At Lanner Electronics (GTSM:6245) Have Stalled

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So, when we ran our eye over Lanner Electronics' (GTSM:6245) trend of ROCE, we liked what we saw.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Lanner Electronics, this is the formula:

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

0.14 = NT$659m ÷ (NT$7.3b - NT$2.5b) (Based on the trailing twelve months to December 2020).

Therefore, Lanner Electronics has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 8.0% generated by the Communications industry.

See our latest analysis for Lanner Electronics

Historical performance is a great place to start when researching a stock so above you can see the gauge for Lanner Electronics' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Lanner Electronics, check out these free graphs here.

What Can We Tell From Lanner Electronics' ROCE Trend?

While the returns on capital are good, they haven't moved much. The company has employed 95% more capital in the last five years, and the returns on that capital have remained stable at 14%. 14% is a pretty standard return, and it provides some comfort knowing that Lanner Electronics has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

What We Can Learn From Lanner Electronics' ROCE

In the end, Lanner Electronics has proven its ability to adequately reinvest capital at good rates of return. And long term investors would be thrilled with the 143% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

One more thing, we've spotted 2 warning signs facing Lanner Electronics that you might find interesting.

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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