AAEON Technology (TWSE:6579) Has Some Way To Go To Become A Multi-Bagger

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Having said that, from a first glance at AAEON Technology (TWSE:6579) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for AAEON Technology, this is the formula:

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

0.065 = NT$860m ÷ (NT$15b - NT$2.1b) (Based on the trailing twelve months to March 2024).

Thus, AAEON Technology has an ROCE of 6.5%. Ultimately, that's a low return and it under-performs the Tech industry average of 11%.

See our latest analysis for AAEON Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for AAEON Technology's ROCE against it's prior returns. If you'd like to look at how AAEON Technology has performed in the past in other metrics, you can view this free graph of AAEON Technology's past earnings, revenue and cash flow.

So How Is AAEON Technology's ROCE Trending?

There are better returns on capital out there than what we're seeing at AAEON Technology. The company has employed 53% more capital in the last five years, and the returns on that capital have remained stable at 6.5%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

In Conclusion...

As we've seen above, AAEON Technology's returns on capital haven't increased but it is reinvesting in the business. Yet to long term shareholders the stock has gifted them an incredible 156% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you want to continue researching AAEON Technology, you might be interested to know about the 2 warning signs that our analysis has discovered.

While AAEON Technology 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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