Are Investors Concerned With What's Going On At Lung Pien Vacuum Industry (GTSM:5267)?

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. Having said that, after a brief look, Lung Pien Vacuum Industry (GTSM:5267) we aren't filled with optimism, but let's investigate further.

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. The formula for this calculation on Lung Pien Vacuum Industry is:

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

0.096 = NT$61m ÷ (NT$812m - NT$182m) (Based on the trailing twelve months to June 2020).

So, Lung Pien Vacuum Industry has an ROCE of 9.6%. In absolute terms, that's a low return but it's around the Machinery industry average of 9.3%.

Check out our latest analysis for Lung Pien Vacuum Industry

Historical performance is a great place to start when researching a stock so above you can see the gauge for Lung Pien Vacuum Industry's ROCE against it's prior returns. If you'd like to look at how Lung Pien Vacuum Industry 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 Lung Pien Vacuum Industry Tell Us?

In terms of Lung Pien Vacuum Industry's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 14% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Lung Pien Vacuum Industry becoming one if things continue as they have.

The Key Takeaway

In summary, it's unfortunate that Lung Pien Vacuum Industry is generating lower returns from the same amount of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 84% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Lung Pien Vacuum Industry does come with some risks though, we found 5 warning signs in our investment analysis, and 2 of those are significant...

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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