What Do The Returns At Deswell Industries (NASDAQ:DSWL) Mean Going Forward?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Deswell Industries (NASDAQ:DSWL) looks quite promising in regards to its trends of return on capital.

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

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 Deswell Industries, this is the formula:

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).

So, Deswell Industries has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Electronic industry average of 11%.

See our latest analysis for Deswell Industries

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'd like to look at how Deswell Industries has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Deswell Industries' ROCE Trending?

We're delighted to see that Deswell Industries is reaping rewards from its investments and has now broken into profitability. The company now earns 1.4% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Deswell Industries has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Key Takeaway

To sum it up, Deswell Industries is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 235% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Deswell Industries can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 2 warning signs with Deswell Industries and understanding these should be part of your investment process.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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