Will The ROCE Trend At Acme Electronics (GTSM:8121) Continue?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Acme Electronics (GTSM:8121) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

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 Acme Electronics:

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

0.029 = NT$69m ÷ (NT$3.5b - NT$1.1b) (Based on the trailing twelve months to September 2020).

Therefore, Acme Electronics has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 10%.

Check out our latest analysis for Acme Electronics

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

What Can We Tell From Acme Electronics' ROCE Trend?

We're delighted to see that Acme Electronics is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 2.9% which is no doubt a relief for some early shareholders. In regards to capital employed, Acme Electronics is using 44% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Acme Electronics could be selling under-performing assets since the ROCE is improving.

In Conclusion...

In the end, Acme Electronics has proven it's capital allocation skills are good with those higher returns from less amount of capital. Since the stock has only returned 13% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.

While Acme Electronics 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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