We Like These Underlying Trends At Shuz Tung Machinery Industrial (GTSM:4537)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Shuz Tung Machinery Industrial (GTSM:4537) looks quite promising in regards to its trends of return on capital.

Understanding 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. To calculate this metric for Shuz Tung Machinery Industrial, this is the formula:

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

0.094 = NT$132m ÷ (NT$3.8b - NT$2.4b) (Based on the trailing twelve months to June 2020).

Thus, Shuz Tung Machinery Industrial has an ROCE of 9.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.3%.

Check out our latest analysis for Shuz Tung Machinery Industrial

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're interested in investigating Shuz Tung Machinery Industrial's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Shuz Tung Machinery Industrial Tell Us?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 9.4%. Basically the business is earning more per dollar of capital invested and in addition to that, 26% more capital is being employed now too. So we're very much inspired by what we're seeing at Shuz Tung Machinery Industrial thanks to its ability to profitably reinvest capital.

On a side note, Shuz Tung Machinery Industrial's current liabilities are still rather high at 63% 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

All in all, it's terrific to see that Shuz Tung Machinery Industrial is reaping the rewards from prior investments and is growing its capital base. And with a respectable 86% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Like most companies, Shuz Tung Machinery Industrial does come with some risks, and we've found 3 warning signs that you should be aware of.

While Shuz Tung Machinery Industrial 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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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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