What Do The Returns At Dynamic Electronics (TPE:6251) Mean Going Forward?

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 when we looked at Dynamic Electronics (TPE:6251) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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 Dynamic Electronics, this is the formula:

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

0.083 = NT$549m ÷ (NT$13b - NT$6.6b) (Based on the trailing twelve months to December 2020).

Therefore, Dynamic Electronics has an ROCE of 8.3%. Ultimately, that's a low return and it under-performs the Electronic industry average of 11%.

Check out our latest analysis for Dynamic Electronics

In the above chart we have measured Dynamic 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.

So How Is Dynamic Electronics' ROCE Trending?

The fact that Dynamic Electronics is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 8.3% on its capital. In addition to that, Dynamic Electronics is employing 23% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

Another thing to note, Dynamic Electronics has a high ratio of current liabilities to total assets of 50%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Dynamic Electronics' ROCE

Overall, Dynamic Electronics gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with a respectable 77% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Dynamic Electronics can keep these trends up, it could have a bright future ahead.

If you want to know some of the risks facing Dynamic Electronics we've found 5 warning signs (1 is concerning!) that you should be aware of before investing here.

While Dynamic Electronics 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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