Genius Electronic OpticalLtd (TWSE:3406) Is Reinvesting At Lower Rates Of Return

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Genius Electronic OpticalLtd (TWSE:3406), we don't think it's current trends fit the mold of a multi-bagger.

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 Genius Electronic OpticalLtd:

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

0.13 = NT$4.6b ÷ (NT$43b - NT$8.9b) (Based on the trailing twelve months to December 2024).

Therefore, Genius Electronic OpticalLtd has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 6.4% generated by the Electronic industry.

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 .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Genius Electronic OpticalLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 13% from 21% five years ago. However it looks like Genius Electronic OpticalLtd 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.

In Conclusion...

In summary, Genius Electronic OpticalLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think Genius Electronic OpticalLtd has the makings of a multi-bagger.

Genius Electronic OpticalLtd does have some risks though, and we've spotted 1 warning sign for Genius Electronic OpticalLtd that you might be interested in.

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.

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

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.