LARGAN PrecisionLtd (TWSE:3008) Will Want To Turn Around Its Return Trends

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at LARGAN PrecisionLtd (TWSE:3008) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for LARGAN PrecisionLtd, this is the formula:

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

0.11 = NT$18b ÷ (NT$206b - NT$37b) (Based on the trailing twelve months to March 2024).

Therefore, LARGAN PrecisionLtd has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 7.0% generated by the Electronic industry.

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'd like, you can check out the forecasts from the analysts covering LARGAN PrecisionLtd for free.

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 27%, but since then they've fallen to 11%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On LARGAN PrecisionLtd's ROCE

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 investors appear hesitant that the trends will pick up because the stock has fallen 15% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you want to continue researching LARGAN PrecisionLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.

While LARGAN PrecisionLtd 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. 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.

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