For this what trends should we look for we want to identify those stocks which can multiply in value in the long term? Generally, we would like to focus on the increasing trend return over and above capital employed (ROCE), an expansion Base of capital employed. Simply put, these types of businesses are compounding machines, meaning they are reinvesting their earnings at a consistently high-rate of return. With that in mind, we’ve spotted some promising trends on Deswell Industries (NASDAQ:DSWL) so let’s look a little deeper.
Understanding Return on Capital Employed (ROCE)
For those who are not sure what ROCE is, it measures the amount of pre-tax profit a company can generate from the capital employed in its business. To calculate this metric for Deswell Industries, the formula is:
Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.045 = US$4.0m ÷ (US$114m – US$24m) (Based on last twelve months to September 2022),
Thus, Deswell Industries’ ROCE is 4.5%. In absolute terms, this is a diminishing return and it underperforms the electronics industry average of 13%.
Check out our latest analysis for Deswell Industries
Historical performance is a great place to start. When researching a stock, you can look at Deswell Industries’ ROCE to gauge its prior returns. If you’re interested in investigating more of Deswell Industries’ past, check this out Free Graph of past earnings, revenue and cash flow.
What can we say from Deswell Industries’ RoCE trend?
While there are companies with higher returns on capital out there, we still find the trend for Deswell Industries promising. Looking at the data, we can see that even though the capital employed in the business has remained relatively flat, the ROCE generated has increased by 135% over the past five years. Basically the business is generating higher returns on the same capital and this is a proof that the efficiency of the company is improving. While it’s worth taking a deeper look because it’s great that the business is more efficient, it can also mean that there is a lack of areas to invest internally for organic growth.
To bring all this together, Deswell Industries has done well to maximize the returns it generates from its capital employed. Given the stock has delivered 19% to its shareholders over the past five years, it might be reasonable to think that investors haven’t fully woken up to the promising trends yet. Given this, we will look further into this stock given that it has more traits that can make it a multiple in the long term.
Deswell Industries does come with some risks though, we found 4 warning signs in our investment analysis, And 1 of them makes us a little uneasy…
For those who like to invest solid companies, check it out Free List of companies with solid balance sheets and high return on equity.
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This Simply Wall St article is general in nature. We only provide commentary based on historical data and analyst forecasts using an unbiased methodology and our articles are not intended to provide financial advice. It is not a recommendation to buy or sell any stock, and does not take into account 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 Street has no position in any of the stocks mentioned.
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