What Do The Returns At China Fineblanking TechnologyLtd (GTSM:1586) Mean Going Forward?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at China Fineblanking TechnologyLtd (GTSM:1586) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

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 China Fineblanking TechnologyLtd:

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

0.085 = NT$219m ÷ (NT$3.8b - NT$1.2b) (Based on the trailing twelve months to September 2020).

Therefore, China Fineblanking TechnologyLtd has an ROCE of 8.5%. On its own, that's a low figure but it's around the 9.3% average generated by the Machinery industry.

View our latest analysis for China Fineblanking TechnologyLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Fineblanking TechnologyLtd's ROCE against it's prior returns. If you'd like to look at how China Fineblanking TechnologyLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

China Fineblanking TechnologyLtd has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 8.5% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, China Fineblanking TechnologyLtd is utilizing 75% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a related note, the company's ratio of current liabilities to total assets has decreased to 32%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

What We Can Learn From China Fineblanking TechnologyLtd's ROCE

In summary, it's great to see that China Fineblanking TechnologyLtd has managed to break into profitability and is continuing to reinvest in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

China Fineblanking TechnologyLtd does have some risks though, and we've spotted 2 warning signs for China Fineblanking TechnologyLtd that you might be interested in.

While China Fineblanking TechnologyLtd 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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