We're Watching These Trends At Gongin Precision Ind (GTSM:3178)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Although, when we looked at Gongin Precision Ind (GTSM:3178), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Gongin Precision Ind is:

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

0.081 = NT$143m ÷ (NT$2.3b - NT$534m) (Based on the trailing twelve months to September 2020).

So, Gongin Precision Ind has an ROCE of 8.1%. In absolute terms, that's a low return but it's around the Machinery industry average of 9.3%.

View our latest analysis for Gongin Precision Ind

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'd like to look at how Gongin Precision Ind 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

On the surface, the trend of ROCE at Gongin Precision Ind doesn't inspire confidence. Over the last five years, returns on capital have decreased to 8.1% from 16% five 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, Gongin Precision Ind has done well to pay down its current liabilities to 23% 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. 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 Gongin Precision Ind's ROCE

While returns have fallen for Gongin Precision Ind in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 168% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Gongin Precision Ind does have some risks, we noticed 3 warning signs (and 1 which is significant) we think you should know about.

While Gongin Precision Ind 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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