Does ACES Electronics (TPE:3605) Have The Makings Of A Multi-Bagger?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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, we've noticed some promising trends at ACES Electronics (TPE:3605) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for ACES Electronics, this is the formula:

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

0.054 = NT$356m ÷ (NT$10b - NT$3.5b) (Based on the trailing twelve months to September 2020).

So, ACES Electronics has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 10%.

See our latest analysis for ACES Electronics

In the above chart we have measured ACES Electronics' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From ACES Electronics' ROCE Trend?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 5.4%. The amount of capital employed has increased too, by 39%. So we're very much inspired by what we're seeing at ACES Electronics thanks to its ability to profitably reinvest capital.

In Conclusion...

In summary, it's great to see that ACES Electronics can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Considering the stock has delivered 25% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

ACES Electronics does have some risks though, and we've spotted 2 warning signs for ACES Electronics that you might be interested in.

While ACES Electronics 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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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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