Here's What We Make Of Hu Lane Associate's (GTSM:6279) Returns On Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. On that note, looking into Hu Lane Associate (GTSM:6279), we weren't too upbeat about how things were going.

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. Analysts use this formula to calculate it for Hu Lane Associate:

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

0.14 = NT$621m ÷ (NT$6.4b - NT$2.0b) (Based on the trailing twelve months to September 2020).

Therefore, Hu Lane Associate has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 4.7% generated by the Auto Components industry.

Check out our latest analysis for Hu Lane Associate

Above you can see how the current ROCE for Hu Lane Associate compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Hu Lane Associate. Unfortunately the returns on capital have diminished from the 24% that they were earning five years ago. 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 Hu Lane Associate to turn into a multi-bagger.

Our Take On Hu Lane Associate's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. And long term shareholders have watched their investments stay flat over the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know about the risks facing Hu Lane Associate, we've discovered 2 warning signs that you should be aware of.

While Hu Lane Associate 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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