KYE Systems' (TWSE:2365) Returns On Capital Are Heading Higher

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 on that note, KYE Systems (TWSE:2365) looks quite promising in regards to its trends of return on capital.

What Is 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. Analysts use this formula to calculate it for KYE Systems:

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

0.0057 = NT$19m ÷ (NT$3.6b - NT$257m) (Based on the trailing twelve months to March 2024).

So, KYE Systems has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Tech industry average of 11%.

Check out our latest analysis for KYE Systems

Historical performance is a great place to start when researching a stock so above you can see the gauge for KYE Systems' ROCE against it's prior returns. If you're interested in investigating KYE Systems' past further, check out this free graph covering KYE Systems' past earnings, revenue and cash flow.

So How Is KYE Systems' ROCE Trending?

While there are companies with higher returns on capital out there, we still find the trend at KYE Systems promising. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 394% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

One more thing to note, KYE Systems has decreased current liabilities to 7.1% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that KYE Systems has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line On KYE Systems' ROCE

As discussed above, KYE Systems appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a staggering 698% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing, we've spotted 2 warning signs facing KYE Systems that you might find interesting.

While KYE Systems 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com