Should We Be Excited About The Trends Of Returns At StrongLED Lighting Systems (Cayman) (GTSM:5281)?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at StrongLED Lighting Systems (Cayman) (GTSM:5281) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for StrongLED Lighting Systems (Cayman), this is the formula:

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

0.077 = NT$72m ÷ (NT$1.4b - NT$519m) (Based on the trailing twelve months to September 2020).

Therefore, StrongLED Lighting Systems (Cayman) has an ROCE of 7.7%. In absolute terms, that's a low return but it's around the Electrical industry average of 7.1%.

See our latest analysis for StrongLED Lighting Systems (Cayman)

Historical performance is a great place to start when researching a stock so above you can see the gauge for StrongLED Lighting Systems (Cayman)'s ROCE against it's prior returns. If you'd like to look at how StrongLED Lighting Systems (Cayman) has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From StrongLED Lighting Systems (Cayman)'s ROCE Trend?

In terms of StrongLED Lighting Systems (Cayman)'s historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 18% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On StrongLED Lighting Systems (Cayman)'s ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for StrongLED Lighting Systems (Cayman) have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 42% over the last three years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing: We've identified 2 warning signs with StrongLED Lighting Systems (Cayman) (at least 1 which shouldn't be ignored) , and understanding these would certainly be useful.

While StrongLED Lighting Systems (Cayman) 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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