Returns On Capital At Chen Nan Iron Wire (GTSM:2071) Paint A Concerning Picture

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Although, when we looked at Chen Nan Iron Wire (GTSM:2071), it didn't seem to tick all of these boxes.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Chen Nan Iron Wire, this is the formula:

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

0.0063 = NT$11m ÷ (NT$2.8b - NT$1.1b) (Based on the trailing twelve months to December 2020).

Thus, Chen Nan Iron Wire has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 9.4%.

See our latest analysis for Chen Nan Iron Wire

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

So How Is Chen Nan Iron Wire's ROCE Trending?

When we looked at the ROCE trend at Chen Nan Iron Wire, we didn't gain much confidence. Over the last four years, returns on capital have decreased to 0.6% from 9.9% four years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Chen Nan Iron Wire has done well to pay down its current liabilities to 37% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

While returns have fallen for Chen Nan Iron Wire in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, total returns to shareholders over the last year have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One final note, you should learn about the 3 warning signs we've spotted with Chen Nan Iron Wire (including 2 which are a bit concerning) .

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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