Returns On Capital - An Important Metric For Harmony Electronics (GTSM:8182)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Harmony Electronics (GTSM:8182) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Harmony Electronics, this is the formula:

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

0.077 = NT$276m ÷ (NT$4.8b - NT$1.2b) (Based on the trailing twelve months to September 2020).

Therefore, Harmony Electronics has an ROCE of 7.7%. Ultimately, that's a low return and it under-performs the Electronic industry average of 10%.

Check out our latest analysis for Harmony Electronics

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

How Are Returns Trending?

Harmony Electronics' ROCE growth is quite impressive. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 110% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

The Key Takeaway

To sum it up, Harmony Electronics is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 189% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you'd like to know about the risks facing Harmony Electronics, we've discovered 1 warning sign that you should be aware of.

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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