Returns On Capital At De Poan Pneumatic (GTSM:1570) Paint A Concerning Picture

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. 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 De Poan Pneumatic (GTSM:1570) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for De Poan Pneumatic, this is the formula:

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

0.098 = NT$75m ÷ (NT$876m - NT$105m) (Based on the trailing twelve months to September 2020).

So, De Poan Pneumatic has an ROCE of 9.8%. Even though it's in line with the industry average of 9.6%, it's still a low return by itself.

View our latest analysis for De Poan Pneumatic

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating De Poan Pneumatic's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is De Poan Pneumatic's ROCE Trending?

On the surface, the trend of ROCE at De Poan Pneumatic doesn't inspire confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 9.8%. 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.

The Key Takeaway

In summary, De Poan Pneumatic 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 21% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Like most companies, De Poan Pneumatic does come with some risks, and we've found 2 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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