Returns On Capital - An Important Metric For Young Fast Optoelectronics (TPE:3622)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Young Fast Optoelectronics (TPE:3622) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Young Fast Optoelectronics, this is the formula:

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

0.0041 = NT$19m ÷ (NT$5.0b - NT$378m) (Based on the trailing twelve months to September 2020).

So, Young Fast Optoelectronics has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 11%.

See our latest analysis for Young Fast Optoelectronics

Historical performance is a great place to start when researching a stock so above you can see the gauge for Young Fast Optoelectronics' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Young Fast Optoelectronics, check out these free graphs here.

So How Is Young Fast Optoelectronics' ROCE Trending?

It's great to see that Young Fast Optoelectronics has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 0.4% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 25%. Young Fast Optoelectronics could be selling under-performing assets since the ROCE is improving.

Our Take On Young Fast Optoelectronics' ROCE

In a nutshell, we're pleased to see that Young Fast Optoelectronics has been able to generate higher returns from less capital. And a remarkable 239% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

Like most companies, Young Fast Optoelectronics does come with some risks, and we've found 1 warning sign that you should be aware of.

While Young Fast Optoelectronics isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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