GLOBAL TEK FABRICATION (TWSE:4566) Will Be Hoping To Turn Its Returns On Capital Around

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at GLOBAL TEK FABRICATION (TWSE: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)

0.032 = NT$207m ÷ (NT$8.8b - NT$2.4b) (Based on the trailing twelve months to March 2024).

So, GLOBAL TEK FABRICATION has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 8.2%.

View our latest analysis for GLOBAL TEK FABRICATION

Historical performance is a great place to start when researching a stock so above you can see the gauge for GLOBAL TEK FABRICATION's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of GLOBAL TEK FABRICATION.

How Are Returns Trending?

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 6.1% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, GLOBAL TEK FABRICATION has done well to pay down its current liabilities to 27% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From GLOBAL TEK FABRICATION's ROCE

In summary, we're somewhat concerned by GLOBAL TEK FABRICATION's diminishing returns on increasing amounts of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 184%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

GLOBAL TEK FABRICATION does have some risks, we noticed 2 warning signs (and 1 which is a bit concerning) we think you should know about.

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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