ALFOT Technologies (GTSM:4553) May Have Issues Allocating Its Capital

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. 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 ALFOT Technologies (GTSM:4553), we weren't too upbeat about how things were going.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for ALFOT Technologies:

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

0.029 = NT$22m ÷ (NT$1.2b - NT$486m) (Based on the trailing twelve months to December 2020).

Therefore, ALFOT Technologies has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 4.8%.

View our latest analysis for ALFOT Technologies

Historical performance is a great place to start when researching a stock so above you can see the gauge for ALFOT Technologies' ROCE against it's prior returns. If you're interested in investigating ALFOT Technologies' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From ALFOT Technologies' ROCE Trend?

There is reason to be cautious about ALFOT Technologies, given the returns are trending downwards. To be more specific, the ROCE was 15% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 ALFOT Technologies to turn into a multi-bagger.

The Key Takeaway

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Long term shareholders who've owned the stock over the last five years have experienced a 38% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to know some of the risks facing ALFOT Technologies we've found 4 warning signs (2 shouldn't be ignored!) that you should be aware of before investing here.

While ALFOT Technologies 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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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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