We're Watching These Trends At East Tender Optoelectronics (GTSM:6588)

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at East Tender Optoelectronics (GTSM:6588), it didn't seem to tick all of these boxes.

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. To calculate this metric for East Tender Optoelectronics, this is the formula:

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).

Thus, 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 10%.

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're interested in investigating East Tender Optoelectronics' past further, check out this free graph of past earnings, revenue and cash flow.

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

On the surface, the trend of ROCE at East Tender Optoelectronics doesn't inspire confidence. Around five years ago the returns on capital were 16%, but since then they've fallen to 9.5%. 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.

The Bottom Line On East Tender Optoelectronics' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that East Tender Optoelectronics is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 24% over the last three years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for East Tender Optoelectronics (of which 1 makes us a bit uncomfortable!) that you should know about.

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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