Returns On Capital Tell Us A Lot About Fu Chian TireLtd (GTSM:5102)

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 combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within Fu Chian TireLtd (GTSM:5102), we weren't too hopeful.

What is Return On Capital Employed (ROCE)?

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. To calculate this metric for Fu Chian TireLtd, this is the formula:

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

0.016 = NT$17m ÷ (NT$1.5b - NT$412m) (Based on the trailing twelve months to September 2020).

Thus, Fu Chian TireLtd has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 4.7%.

View our latest analysis for Fu Chian TireLtd

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

What Can We Tell From Fu Chian TireLtd's ROCE Trend?

We are a bit worried about the trend of returns on capital at Fu Chian TireLtd. About five years ago, returns on capital were 5.1%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Fu Chian TireLtd to turn into a multi-bagger.

In Conclusion...

In summary, it's unfortunate that Fu Chian TireLtd is generating lower returns from the same amount of capital. However the stock has delivered a 44% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Fu Chian TireLtd does have some risks, we noticed 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While Fu Chian TireLtd 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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