S-Tech (GTSM:1584) Is Looking To Continue Growing Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in S-Tech's (GTSM:1584) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for S-Tech:

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

0.0034 = NT$5.0m ÷ (NT$2.1b - NT$609m) (Based on the trailing twelve months to December 2020).

Therefore, S-Tech has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Machinery industry average of 9.6%.

See our latest analysis for S-Tech

Historical performance is a great place to start when researching a stock so above you can see the gauge for S-Tech's ROCE against it's prior returns. If you're interested in investigating S-Tech's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From S-Tech's ROCE Trend?

It's great to see that S-Tech has started to generate some pre-tax earnings from prior investments. While the business is profitable now, it used to be incurring losses on invested capital five years ago. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 32%. This could potentially mean that the company is selling some of its assets.

In Conclusion...

In a nutshell, we're pleased to see that S-Tech has been able to generate higher returns from less capital. Given the stock has declined 15% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

S-Tech does have some risks, we noticed 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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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