Genius Electronic Optical (TPE:3406) Knows How To Allocate Capital Effectively

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 when we looked at the ROCE trend of Genius Electronic Optical (TPE:3406) we really liked what we saw.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Genius Electronic Optical:

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

0.23 = NT$4.3b ÷ (NT$24b - NT$5.9b) (Based on the trailing twelve months to September 2020).

So, Genius Electronic Optical has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 10% earned by companies in a similar industry.

View our latest analysis for Genius Electronic Optical

In the above chart we have measured Genius Electronic Optical's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Genius Electronic Optical.

What Does the ROCE Trend For Genius Electronic Optical Tell Us?

Genius Electronic Optical has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 23% on its capital. Not only that, but the company is utilizing 142% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

One more thing to note, Genius Electronic Optical has decreased current liabilities to 24% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Genius Electronic Optical has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line On Genius Electronic Optical's ROCE

Long story short, we're delighted to see that Genius Electronic Optical's reinvestment activities have paid off and the company is now profitable. And a remarkable 786% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Genius Electronic Optical can keep these trends up, it could have a bright future ahead.

While Genius Electronic Optical looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether 3406 is currently trading for a fair price.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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