Returns On Capital Signal Tricky Times Ahead For Bright Sheland International (GTSM:4556)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Bright Sheland International (GTSM:4556) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Bright Sheland International is:

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

0.021 = NT$30m ÷ (NT$1.7b - NT$213m) (Based on the trailing twelve months to December 2020).

Thus, Bright Sheland International has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Machinery industry average of 9.5%.

View our latest analysis for Bright Sheland International

Historical performance is a great place to start when researching a stock so above you can see the gauge for Bright Sheland International's ROCE against it's prior returns. If you'd like to look at how Bright Sheland International has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Bright Sheland International's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 4.0% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Bright Sheland International's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 19% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you'd like to know more about Bright Sheland International, we've spotted 4 warning signs, and 2 of them can't be ignored.

While Bright Sheland International 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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