Returns On Capital Are Showing Encouraging Signs At Koge Micro Tech (GTSM:4568)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. With that in mind, we've noticed some promising trends at Koge Micro Tech (GTSM:4568) so let's look a bit deeper.

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. Analysts use this formula to calculate it for Koge Micro Tech:

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

0.16 = NT$201m ÷ (NT$1.7b - NT$419m) (Based on the trailing twelve months to December 2020).

Therefore, Koge Micro Tech has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 9.6% it's much better.

View our latest analysis for Koge Micro Tech

Historical performance is a great place to start when researching a stock so above you can see the gauge for Koge Micro Tech's ROCE against it's prior returns. If you'd like to look at how Koge Micro Tech 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?

The trends we've noticed at Koge Micro Tech are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 16%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 90%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 25% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

Our Take On Koge Micro Tech's ROCE

All in all, it's terrific to see that Koge Micro Tech is reaping the rewards from prior investments and is growing its capital base. And since the stock has fallen 16% over the last three years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

Koge Micro Tech does have some risks, we noticed 4 warning signs (and 2 which can't be ignored) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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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