Stock Analysis

Deswell Industries (NASDAQ:DSWL) Is Experiencing Growth In Returns On Capital

NasdaqGM:DSWL
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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Deswell Industries (NASDAQ:DSWL) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Deswell Industries:

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

0.014 = US$1.1m ÷ (US$100m - US$19m) (Based on the trailing twelve months to September 2020).

Therefore, Deswell Industries has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Electronic industry average of 10%.

View our latest analysis for Deswell Industries

roce
NasdaqGM:DSWL Return on Capital Employed May 23rd 2021

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Deswell Industries' past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

Shareholders will be relieved that Deswell Industries has broken into profitability. The company now earns 1.4% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Bottom Line On Deswell Industries' ROCE

To sum it up, Deswell Industries is collecting higher returns from the same amount of capital, and that's impressive. And a remarkable 210% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing, we've spotted 3 warning signs facing Deswell Industries that you might find interesting.

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. 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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About NasdaqGM:DSWL

Deswell Industries

Manufactures and sells injection-molded plastic parts and components, electronic products and subassemblies, and metallic molds and accessory parts for original equipment manufacturers and contract manufacturers in China, the United States, Europe, Hong Kong, the United Kingdom, Canada, and internationally.

Flawless balance sheet with solid track record and pays a dividend.