Tons Lightology (GTSM:4972) Is Finding It Tricky To Allocate Its Capital

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Tons Lightology (GTSM:4972) we aren't filled with optimism, but let's investigate further.

What is Return On Capital Employed (ROCE)?

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 Tons Lightology, this is the formula:

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

0.075 = NT$87m ÷ (NT$1.4b - NT$222m) (Based on the trailing twelve months to December 2020).

Thus, Tons Lightology has an ROCE of 7.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.6%.

Check out our latest analysis for Tons Lightology

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 Tons Lightology, check out these free graphs here.

The Trend Of ROCE

There is reason to be cautious about Tons Lightology, given the returns are trending downwards. About five years ago, returns on capital were 13%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Tons Lightology to turn into a multi-bagger.

In Conclusion...

In summary, it's unfortunate that Tons Lightology is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 20% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you want to know some of the risks facing Tons Lightology we've found 3 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

While Tons Lightology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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