Can Tung Thih Electronic (GTSM:3552) Turn Things Around?

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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. On that note, looking into Tung Thih Electronic (GTSM:3552), we weren't too upbeat about how things were going.

What is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Tung Thih Electronic:

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

0.039 = NT$144m ÷ (NT$8.0b - NT$4.3b) (Based on the trailing twelve months to September 2020).

So, Tung Thih Electronic has an ROCE of 3.9%. On its own, that's a low figure but it's around the 4.7% average generated by the Auto Components industry.

Check out our latest analysis for Tung Thih Electronic

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tung Thih Electronic's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Tung Thih Electronic, check out these free graphs here.

How Are Returns Trending?

In terms of Tung Thih Electronic's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 24% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Tung Thih Electronic to turn into a multi-bagger.

On a separate but related note, it's important to know that Tung Thih Electronic has a current liabilities to total assets ratio of 54%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors haven't taken kindly to these developments, since the stock has declined 27% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about Tung Thih Electronic, we've spotted 3 warning signs, and 2 of them are potentially serious.

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