Has Chumpower Machinery (GTSM:4575) Got What It Takes To Become A Multi-Bagger?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Chumpower Machinery (GTSM:4575), it didn't seem to tick all of these boxes.

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 Chumpower Machinery is:

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

0.0041 = NT$7.0m ÷ (NT$3.0b - NT$1.3b) (Based on the trailing twelve months to June 2020).

Thus, Chumpower Machinery has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Machinery industry average of 9.4%.

See our latest analysis for Chumpower Machinery

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 Chumpower Machinery, check out these free graphs here.

What Can We Tell From Chumpower Machinery's ROCE Trend?

When we looked at the ROCE trend at Chumpower Machinery, we didn't gain much confidence. Over the last three years, returns on capital have decreased to 0.4% from 12% three years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Another thing to note, Chumpower Machinery has a high ratio of current liabilities to total assets of 43%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Chumpower Machinery. Furthermore the stock has climbed 13% over the last year, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

Chumpower Machinery does come with some risks though, we found 6 warning signs in our investment analysis, and 2 of those make us uncomfortable...

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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