LARGAN PrecisionLtd (TWSE:3008) Could Be Struggling To Allocate Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after briefly looking over the numbers, we don't think LARGAN PrecisionLtd (TWSE:3008) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on LARGAN PrecisionLtd is:

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

0.10 = NT$17b ÷ (NT$190b - NT$29b) (Based on the trailing twelve months to September 2023).

Therefore, LARGAN PrecisionLtd has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 8.3% it's much better.

View our latest analysis for LARGAN PrecisionLtd

Above you can see how the current ROCE for LARGAN PrecisionLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for LARGAN PrecisionLtd .

So How Is LARGAN PrecisionLtd's ROCE Trending?

When we looked at the ROCE trend at LARGAN PrecisionLtd, we didn't gain much confidence. Around five years ago the returns on capital were 32%, but since then they've fallen to 10%. However it looks like LARGAN PrecisionLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by LARGAN PrecisionLtd's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 33% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think LARGAN PrecisionLtd has the makings of a multi-bagger.

On a separate note, we've found 1 warning sign for LARGAN PrecisionLtd you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.