Returns On Capital Are A Standout For Hengs Technology (GTSM:4582)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Hengs Technology (GTSM:4582) looks great, so lets see what the trend can tell us.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Hengs Technology, this is the formula:

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

0.21 = NT$280m ÷ (NT$2.3b - NT$980m) (Based on the trailing twelve months to December 2020).

Therefore, Hengs Technology has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 7.7% earned by companies in a similar industry.

See our latest analysis for Hengs Technology

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'd like to look at how Hengs Technology has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Hengs Technology Tell Us?

Investors would be pleased with what's happening at Hengs Technology. The numbers show that in the last four years, the returns generated on capital employed have grown considerably to 21%. The amount of capital employed has increased too, by 128%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Another thing to note, Hengs Technology has a high ratio of current liabilities to total assets of 42%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Hengs Technology's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Hengs Technology has. And a remarkable 108% total return over the last year tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Hengs Technology can keep these trends up, it could have a bright future ahead.

On a final note, we've found 4 warning signs for Hengs Technology that we think you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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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