Here’s What’s Happening With Returns At Asia Neo Tech IndustrialLtd (GTSM:4542)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Speaking of which, we noticed some great changes in Asia Neo Tech IndustrialLtd's (GTSM:4542) returns on capital, so let's have a look.

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

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 Asia Neo Tech IndustrialLtd, this is the formula:

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

0.051 = NT$34m ÷ (NT$1.0b - NT$328m) (Based on the trailing twelve months to September 2020).

Thus, Asia Neo Tech IndustrialLtd has an ROCE of 5.1%. Ultimately, that's a low return and it under-performs the Machinery industry average of 9.3%.

See our latest analysis for Asia Neo Tech IndustrialLtd

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

The Trend Of ROCE

Asia Neo Tech IndustrialLtd has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 38% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 33% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Bottom Line On Asia Neo Tech IndustrialLtd's ROCE

As discussed above, Asia Neo Tech IndustrialLtd appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a solid 48% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. 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.

Asia Neo Tech IndustrialLtd does have some risks though, and we've spotted 3 warning signs for Asia Neo Tech IndustrialLtd that you might be interested in.

While Asia Neo Tech IndustrialLtd 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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