We Like These Underlying Return On Capital Trends At Solteam Electronics (GTSM:3484)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Solteam Electronics (GTSM:3484) and its trend of ROCE, we really liked what we saw.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Solteam Electronics is:

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

0.18 = NT$432m ÷ (NT$4.5b - NT$2.1b) (Based on the trailing twelve months to December 2020).

Thus, Solteam Electronics has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 7.6% it's much better.

View our latest analysis for Solteam Electronics

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

How Are Returns Trending?

Solteam Electronics has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 76% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 47% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

Our Take On Solteam Electronics' ROCE

As discussed above, Solteam Electronics appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And a remarkable 159% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Like most companies, Solteam Electronics does come with some risks, and we've found 1 warning sign that you should be aware of.

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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