New Best Wire IndustrialLtd's (GTSM:5013) Returns On Capital Not Reflecting Well On The Business

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at New Best Wire IndustrialLtd (GTSM:5013), 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. Analysts use this formula to calculate it for New Best Wire IndustrialLtd:

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

0.077 = NT$432m ÷ (NT$7.2b - NT$1.5b) (Based on the trailing twelve months to December 2020).

Therefore, New Best Wire IndustrialLtd has an ROCE of 7.7%. Even though it's in line with the industry average of 7.6%, it's still a low return by itself.

Check out our latest analysis for New Best Wire IndustrialLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for New Best Wire IndustrialLtd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of New Best Wire IndustrialLtd, check out these free graphs here.

What Can We Tell From New Best Wire IndustrialLtd's ROCE Trend?

In terms of New Best Wire IndustrialLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 11% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On New Best Wire IndustrialLtd's ROCE

To conclude, we've found that New Best Wire IndustrialLtd is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 104% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing: We've identified 2 warning signs with New Best Wire IndustrialLtd (at least 1 which doesn't sit too well with us) , and understanding these would certainly be useful.

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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