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. Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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 on that note, Jhen Vei Electronic (GTSM:3520) looks quite promising in regards to its trends of return on capital.
What is Return On Capital Employed (ROCE)?
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. To calculate this metric for Jhen Vei Electronic, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.047 = NT$27m ÷ (NT$840m – NT$277m) (Based on the trailing twelve months to June 2020).
Therefore, Jhen Vei Electronic has an ROCE of 4.7%. In absolute terms, that’s a low return and it also under-performs the Electronic industry average of 9.4%.
View our latest analysis for Jhen Vei Electronic
Historical performance is a great place to start when researching a stock so above you can see the gauge for Jhen Vei Electronic’s ROCE against it’s prior returns. If you’d like to look at how Jhen Vei Electronic has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From Jhen Vei Electronic’s ROCE Trend?
Shareholders will be relieved that Jhen Vei Electronic has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 4.7%, which is always encouraging. While returns have increased, the amount of capital employed by Jhen Vei Electronic 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. So if you’re looking for high growth, you’ll want to see a business’s capital employed also increasing.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 33% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It’s worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.The Bottom Line On Jhen Vei Electronic’s ROCE
In summary, we’re delighted to see that Jhen Vei Electronic has been able to increase efficiencies and earn higher rates of return on the same amount of capital. However the stock is down a substantial 88% in the last five years so there could be other areas of the business hurting its prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.
One more thing: We’ve identified 4 warning signs with Jhen Vei Electronic (at least 1 which is significant) , and understanding these would certainly be useful.
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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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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August 31, 2020 at 09:15AM
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Can Jhen Vei Electronic (GTSM:3520) Continue To Grow Its Returns On Capital? - Simply Wall St
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