Is Kuen Ling Machinery Refrigerating (GTSM:4527) Likely To Turn Things Around?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Kuen Ling Machinery Refrigerating (GTSM:4527) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Kuen Ling Machinery Refrigerating is:

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

0.14 = NT$247m ÷ (NT$2.6b - NT$915m) (Based on the trailing twelve months to September 2020).

So, Kuen Ling Machinery Refrigerating has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 9.3% generated by the Machinery industry.

Check out our latest analysis for Kuen Ling Machinery Refrigerating

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 want to delve into the historical earnings, revenue and cash flow of Kuen Ling Machinery Refrigerating, check out these free graphs here.

The Trend Of ROCE

There hasn't been much to report for Kuen Ling Machinery Refrigerating's returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Kuen Ling Machinery Refrigerating doesn't end up being a multi-bagger in a few years time.

The Bottom Line

In a nutshell, Kuen Ling Machinery Refrigerating has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has gained an impressive 61% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Kuen Ling Machinery Refrigerating (of which 1 shouldn't be ignored!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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