Returns On Capital Are Showing Encouraging Signs At Genes Tech Group Holdings (HKG:8257)

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Genes Tech Group Holdings (HKG:8257) and its trend of ROCE, we really liked what we saw.

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. To calculate this metric for Genes Tech Group Holdings, this is the formula:

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

0.14 = NT$135m ÷ (NT$2.3b - NT$1.3b) (Based on the trailing twelve months to September 2023).

Thus, Genes Tech Group Holdings has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Semiconductor industry average of 12%.

View our latest analysis for Genes Tech Group Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Genes Tech Group Holdings' ROCE against it's prior returns. If you'd like to look at how Genes Tech Group Holdings has performed in the past in other metrics, you can view this free graph of Genes Tech Group Holdings' past earnings, revenue and cash flow.

The Trend Of ROCE

We like the trends that we're seeing from Genes Tech Group Holdings. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 14%. The amount of capital employed has increased too, by 58%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, Genes Tech Group Holdings' current liabilities are still rather high at 57% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

In summary, it's great to see that Genes Tech Group Holdings can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. However the stock is down a substantial 72% in the last five years so there could be other areas of the business hurting its prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Genes Tech Group Holdings (of which 3 can't be ignored!) that you should know about.

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.