Our Take On The Returns On Capital At SuperAlloy Industrial (GTSM:1563)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating SuperAlloy Industrial (GTSM:1563), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on SuperAlloy Industrial is:

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

0.0052 = NT$69m ÷ (NT$17b - NT$3.4b) (Based on the trailing twelve months to June 2020).

So, SuperAlloy Industrial has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 4.7%.

View our latest analysis for SuperAlloy Industrial

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're interested in investigating SuperAlloy Industrial's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From SuperAlloy Industrial's ROCE Trend?

When we looked at the ROCE trend at SuperAlloy Industrial, we didn't gain much confidence. To be more specific, ROCE has fallen from 18% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for SuperAlloy Industrial have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 42% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing: We've identified 3 warning signs with SuperAlloy Industrial (at least 2 which are a bit concerning) , and understanding these would certainly be useful.

While SuperAlloy Industrial may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. 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.
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