Stock Analysis

Is There More Growth In Store For Asia Optical's (TPE:3019) Returns On Capital?

TWSE:3019
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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 on that note, Asia Optical (TPE:3019) looks quite promising in regards to its trends of return on capital.

What is 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. Analysts use this formula to calculate it for Asia Optical:

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

0.053 = NT$806m ÷ (NT$20b - NT$4.8b) (Based on the trailing twelve months to September 2020).

Therefore, Asia Optical has an ROCE of 5.3%. Ultimately, that's a low return and it under-performs the Electronic industry average of 11%.

See our latest analysis for Asia Optical

roce
TSEC:3019 Return on Capital Employed March 8th 2021

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Asia Optical has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Asia Optical's ROCE Trending?

Asia Optical has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 224% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

In Conclusion...

To bring it all together, Asia Optical has done well to increase the returns it's generating from its capital employed. Since the stock has returned a staggering 222% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Asia Optical can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing Asia Optical, we've discovered 2 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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