Returns On Capital - An Important Metric For Silicon Optronics (TPE:3530)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. 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 when we looked at Silicon Optronics (TPE:3530) and its trend of ROCE, we really liked what we saw.

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. The formula for this calculation on Silicon Optronics is:

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

0.09 = NT$219m ÷ (NT$2.8b - NT$413m) (Based on the trailing twelve months to September 2020).

Therefore, Silicon Optronics has an ROCE of 9.0%. In absolute terms, that's a low return but it's around the Electronic industry average of 10%.

View our latest analysis for Silicon Optronics

In the above chart we have measured Silicon Optronics' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Silicon Optronics here for free.

The Trend Of ROCE

We're delighted to see that Silicon Optronics is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 9.0% on its capital. Not only that, but the company is utilizing 250% 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.

The Bottom Line

Overall, Silicon Optronics gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Since the stock has returned a staggering 115% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you'd like to know more about Silicon Optronics, we've spotted 2 warning signs, and 1 of them is significant.

While Silicon Optronics 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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