Will Genius Electronic Optical (TPE:3406) Become A Multi-Bagger?

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Genius Electronic Optical (TPE:3406) looks great, so lets see what the trend can tell us.

Understanding 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).

Thus, Genius Electronic Optical has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Electronic industry average of 11%.

See our latest analysis for Genius Electronic Optical

Above you can see how the current ROCE for Genius Electronic Optical compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

The fact that Genius Electronic Optical is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 23% on its capital. And unsurprisingly, like most companies trying to break into the black, Genius Electronic Optical is utilizing 142% more capital than it was five years ago. 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.

On a related note, the company's ratio of current liabilities to total assets has decreased to 24%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Key Takeaway

In summary, it's great to see that Genius Electronic Optical has managed to break into profitability and is continuing to reinvest in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. 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.

On a separate note, we've found 2 warning signs for Genius Electronic Optical you'll probably want to know about.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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