Bright LED Electronics' (TWSE:3031) Returns Have Hit A Wall

Simply Wall St · 10/16 22:37

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. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Bright LED Electronics (TWSE:3031) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Bright LED Electronics:

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

0.033 = NT$103m ÷ (NT$3.7b - NT$566m) (Based on the trailing twelve months to June 2024).

So, Bright LED Electronics has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 8.8%.

Check out our latest analysis for Bright LED Electronics

roce
TWSE:3031 Return on Capital Employed October 16th 2024

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 Bright LED Electronics has performed in the past in other metrics, you can view this free graph of Bright LED Electronics' past earnings, revenue and cash flow.

The Trend Of ROCE

Things have been pretty stable at Bright LED Electronics, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at Bright LED Electronics in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

Our Take On Bright LED Electronics' ROCE

In summary, Bright LED Electronics isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Although the market must be expecting these trends to improve because the stock has gained 82% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we found 2 warning signs for Bright LED Electronics (1 makes us a bit uncomfortable) you should be aware of.

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.