Genius Electronic OpticalLtd (TWSE:3406) Is Experiencing Growth In Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Genius Electronic OpticalLtd (TWSE:3406) and its trend of ROCE, we really liked what we saw.

What Is 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. To calculate this metric for Genius Electronic OpticalLtd, this is the formula:

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

0.15 = NT$4.8b ÷ (NT$43b - NT$11b) (Based on the trailing twelve months to March 2024).

Thus, Genius Electronic OpticalLtd has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 6.7% it's much better.

Check out our latest analysis for Genius Electronic OpticalLtd

Above you can see how the current ROCE for Genius Electronic OpticalLtd 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 Genius Electronic OpticalLtd .

So How Is Genius Electronic OpticalLtd's ROCE Trending?

The trends we've noticed at Genius Electronic OpticalLtd are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 15%. Basically the business is earning more per dollar of capital invested and in addition to that, 231% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

What We Can Learn From Genius Electronic OpticalLtd's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Genius Electronic OpticalLtd has. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 34% to shareholders. So with that in mind, we think the stock deserves further research.

If you want to know some of the risks facing Genius Electronic OpticalLtd we've found 3 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

While Genius Electronic OpticalLtd 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.