What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Deswell Industries is:

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

0.035 = US$3.1m ÷ (US$110m - US$20m) (Based on the trailing twelve months to March 2023).

So, Deswell Industries has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 13%.

Check out our latest analysis for Deswell Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Deswell Industries' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Deswell Industries, check out these free graphs here.

What Does the ROCE Trend For Deswell Industries Tell Us?

While there are companies with higher returns on capital out there, we still find the trend at Deswell Industries promising. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 48% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

The Key Takeaway

As discussed above, Deswell Industries appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. With that in mind, we believe the promising trends warrant this stock for further investigation.