We Like These Underlying Trends At Desiccant Technology (GTSM:5292)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Desiccant Technology's (GTSM:5292) returns on capital, so let's have a look.

Understanding 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 Desiccant Technology, this is the formula:

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

0.18 = NT$96m ÷ (NT$1.2b - NT$710m) (Based on the trailing twelve months to June 2020).

Therefore, Desiccant Technology has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 9.4% generated by the Machinery industry.

See our latest analysis for Desiccant Technology

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

So How Is Desiccant Technology's ROCE Trending?

Desiccant Technology's ROCE growth is quite impressive. The figures show that over the last three years, ROCE has grown 60% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

Another thing to note, Desiccant Technology has a high ratio of current liabilities to total assets of 57%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Desiccant Technology's ROCE

To bring it all together, Desiccant Technology has done well to increase the returns it's generating from its capital employed. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 80% return over the last year. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a separate note, we've found 4 warning signs for Desiccant Technology you'll probably want to know about.

While Desiccant Technology may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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