Returns On Capital At Genes Tech Group Holdings (HKG:8257) Have Stalled

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. That's why when we briefly looked at Genes Tech Group Holdings' (HKG:8257) ROCE trend, we were pretty happy with what we saw.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.15 = NT$162m ÷ (NT$2.5b - NT$1.4b) (Based on the trailing twelve months to March 2021).

Therefore, Genes Tech Group Holdings has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 8.5% generated by the Semiconductor industry.

See 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 past earnings, revenue and cash flow.

What Can We Tell From Genes Tech Group Holdings' ROCE Trend?

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 15% for the last five years, and the capital employed within the business has risen 183% in that time. 15% is a pretty standard return, and it provides some comfort knowing that Genes Tech Group Holdings has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

On a side note, Genes Tech Group Holdings has done well to reduce current liabilities to 57% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk. Although because current liabilities are still 57%, some of that risk is still prevalent.

The Bottom Line

The main thing to remember is that Genes Tech Group Holdings has proven its ability to continually reinvest at respectable rates of return. However, over the last three years, the stock has only delivered a 15% return to shareholders who held over that period. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.

Genes Tech Group Holdings does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

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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