Can Ablerex Electronics (GTSM:3628) Turn Things Around?

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after glancing at the trends within Ablerex Electronics (GTSM:3628), we weren't too hopeful.

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. Analysts use this formula to calculate it for Ablerex Electronics:

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

0.032 = NT$51m ÷ (NT$2.9b - NT$1.3b) (Based on the trailing twelve months to September 2020).

Thus, Ablerex Electronics has an ROCE of 3.2%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 7.1%.

See our latest analysis for Ablerex Electronics

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

What Does the ROCE Trend For Ablerex Electronics Tell Us?

There is reason to be cautious about Ablerex Electronics, given the returns are trending downwards. About five years ago, returns on capital were 11%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Ablerex Electronics becoming one if things continue as they have.

On a side note, Ablerex Electronics' current liabilities are still rather high at 45% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. And long term shareholders have watched their investments stay flat over the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing: We've identified 3 warning signs with Ablerex Electronics (at least 1 which is a bit unpleasant) , and understanding these would certainly be useful.

While Ablerex Electronics may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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