The Returns On Capital At Global Testing (SGX:AYN) Don't Inspire Confidence

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. Having said that, after a brief look, Global Testing (SGX:AYN) we aren't filled with optimism, but let's investigate further.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Global Testing:

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

0.02 = US$589k ÷ (US$37m - US$7.0m) (Based on the trailing twelve months to December 2020).

Therefore, Global Testing has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 7.1%.

Check out our latest analysis for Global Testing

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 Global Testing has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Global Testing Tell Us?

The trend of ROCE at Global Testing is showing some signs of weakness. The company used to generate 5.8% on its capital five years ago but it has since fallen noticeably. In addition to that, Global Testing is now employing 39% less capital than it was five years ago. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

The Bottom Line

To see Global Testing reducing the capital employed in the business in tandem with diminishing returns, is concerning. Despite the concerning underlying trends, the stock has actually gained 1.7% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you'd like to know more about Global Testing, we've spotted 3 warning signs, and 1 of them can't be ignored.

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.

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