Returns On Capital Are A Standout For Gold Circuit Electronics (TWSE:2368)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Gold Circuit Electronics' (TWSE:2368) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Gold Circuit Electronics is:

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

0.30 = NT$7.3b ÷ (NT$38b - NT$14b) (Based on the trailing twelve months to June 2024).

Therefore, Gold Circuit Electronics has an ROCE of 30%. In absolute terms that's a great return and it's even better than the Electronic industry average of 6.8%.

Check out our latest analysis for Gold Circuit Electronics

Above you can see how the current ROCE for Gold Circuit Electronics compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Gold Circuit Electronics for free.

What The Trend Of ROCE Can Tell Us

Gold Circuit Electronics is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 30%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 145%. So we're very much inspired by what we're seeing at Gold Circuit Electronics thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 36%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Gold Circuit Electronics has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line On Gold Circuit Electronics' ROCE

In summary, it's great to see that Gold Circuit Electronics can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 1,199% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Gold Circuit Electronics can keep these trends up, it could have a bright future ahead.

On a final note, we found 2 warning signs for Gold Circuit Electronics (1 is potentially serious) you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.