These Metrics Don't Make Fine Blanking & Tool (GTSM:4535) Look Too Strong

What financial metrics can indicate to us that a company is maturing or even in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Fine Blanking & Tool (GTSM:4535), the trends above didn't look too great.

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

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. Analysts use this formula to calculate it for Fine Blanking & Tool:

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

0.056 = NT$136m ÷ (NT$2.7b - NT$302m) (Based on the trailing twelve months to September 2020).

Therefore, Fine Blanking & Tool has an ROCE of 5.6%. In absolute terms, that's a low return, but it's much better than the Auto Components industry average of 4.7%.

Check out our latest analysis for Fine Blanking & Tool

Historical performance is a great place to start when researching a stock so above you can see the gauge for Fine Blanking & Tool's ROCE against it's prior returns. If you'd like to look at how Fine Blanking & Tool has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Fine Blanking & Tool's ROCE Trending?

There is reason to be cautious about Fine Blanking & Tool, given the returns are trending downwards. To be more specific, the ROCE was 12% 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 Fine Blanking & Tool to turn into a multi-bagger.

On a side note, Fine Blanking & Tool has done well to pay down its current liabilities to 11% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Fine Blanking & Tool's ROCE

In summary, it's unfortunate that Fine Blanking & Tool is generating lower returns from the same amount of capital. And long term shareholders have watched their investments stay flat over the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know more about Fine Blanking & Tool, we've spotted 3 warning signs, and 1 of them is a bit unpleasant.

While Fine Blanking & Tool isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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