Investors Could Be Concerned With GLOBAL TEK FABRICATION's (TPE:4566) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at GLOBAL TEK FABRICATION (TPE:4566) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for GLOBAL TEK FABRICATION:

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

0.043 = NT$154m ÷ (NT$5.2b - NT$1.7b) (Based on the trailing twelve months to December 2020).

So, GLOBAL TEK FABRICATION has an ROCE of 4.3%. In absolute terms, that's a low return but it's around the Auto Components industry average of 4.7%.

View our latest analysis for GLOBAL TEK FABRICATION

In the above chart we have measured GLOBAL TEK FABRICATION's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for GLOBAL TEK FABRICATION.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at GLOBAL TEK FABRICATION, we didn't gain much confidence. To be more specific, ROCE has fallen from 12% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

In summary, GLOBAL TEK FABRICATION is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly, the stock has only gained 20% over the last three years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One more thing to note, we've identified 2 warning signs with GLOBAL TEK FABRICATION and understanding these should be part of your investment process.

While GLOBAL TEK FABRICATION 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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