What financial metrics can indicate to us that a company is maturing or even in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Genetec Technology Berhad (KLSE:GENETEC), we weren't too hopeful.
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 Genetec Technology Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.069 = RM6.5m ÷ (RM134m - RM40m) (Based on the trailing twelve months to September 2020).
Thus, Genetec Technology Berhad has an ROCE of 6.9%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 12%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Genetec Technology Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Genetec Technology Berhad, check out these free graphs here.
How Are Returns Trending?
We are a bit worried about the trend of returns on capital at Genetec Technology Berhad. To be more specific, the ROCE was 24% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Genetec Technology Berhad to turn into a multi-bagger.
What We Can Learn From Genetec Technology Berhad's ROCE
In summary, it's unfortunate that Genetec Technology Berhad is generating lower returns from the same amount of capital. Yet despite these poor fundamentals, the stock has gained a huge 107% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
If you'd like to know more about Genetec Technology Berhad, we've spotted 5 warning signs, and 1 of them is concerning.
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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