Has East Tender Optoelectronics (GTSM:6588) Got What It Takes To Become A Multi-Bagger?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think East Tender Optoelectronics (GTSM:6588) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for East Tender Optoelectronics:

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

0.095 = NT$89m ÷ (NT$1.0b - NT$72m) (Based on the trailing twelve months to September 2020).

So, East Tender Optoelectronics has an ROCE of 9.5%. In absolute terms, that's a low return but it's around the Electronic industry average of 11%.

Check out our latest analysis for East Tender Optoelectronics

Historical performance is a great place to start when researching a stock so above you can see the gauge for East Tender Optoelectronics' ROCE against it's prior returns. If you'd like to look at how East Tender Optoelectronics has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For East Tender Optoelectronics Tell Us?

When we looked at the ROCE trend at East Tender Optoelectronics, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.5% from 16% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On East Tender Optoelectronics' ROCE

While returns have fallen for East Tender Optoelectronics in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 30% over the last three years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for East Tender Optoelectronics (of which 1 is significant!) that you should know about.

While East Tender Optoelectronics 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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