There's Been No Shortage Of Growth Recently For HannStar Display's (TPE:6116) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at HannStar Display (TPE:6116) so let's look a bit deeper.

What is 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. Analysts use this formula to calculate it for HannStar Display:

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

0.06 = NT$2.7b ÷ (NT$52b - NT$7.0b) (Based on the trailing twelve months to December 2020).

Therefore, HannStar Display has an ROCE of 6.0%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 10%.

View 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 Does the ROCE Trend For HannStar Display Tell Us?

HannStar Display has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 6.0% which is a sight for sore eyes. Not only that, but the company is utilizing 38% 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 Key Takeaway

Overall, HannStar Display 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 522% 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 about the risks facing HannStar Display, we've discovered 3 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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