Can HannStar Display (TPE:6116) Continue To Grow Its Returns On Capital?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. 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 on that note, HannStar Display (TPE:6116) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on HannStar Display is:

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

0.022 = NT$919m ÷ (NT$49b - NT$7.9b) (Based on the trailing twelve months to September 2020).

Thus, HannStar Display has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 11%.

Check out our latest analysis for HannStar Display

Historical performance is a great place to start when researching a stock so above you can see the gauge for HannStar Display's ROCE against it's prior returns. If you'd like to look at how HannStar Display has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The fact that HannStar Display is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 2.2% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, HannStar Display is utilizing 22% 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.

The Bottom Line

Long story short, we're delighted to see that HannStar Display's reinvestment activities have paid off and the company is now profitable. And a remarkable 281% 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, HannStar Display does come with some risks, and we've found 1 warning sign that you should be aware of.

While HannStar Display 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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