Is There More Growth In Store For Sun-Sea Construction's (GTSM:5516) Returns On Capital?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Sun-Sea Construction's (GTSM:5516) returns on capital, so let's have a look.

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. To calculate this metric for Sun-Sea Construction, this is the formula:

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

0.12 = NT$69m ÷ (NT$1.7b - NT$1.1b) (Based on the trailing twelve months to September 2020).

So, Sun-Sea Construction has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 7.5% generated by the Construction industry.

See our latest analysis for Sun-Sea Construction

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'd like to look at how Sun-Sea Construction has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Sun-Sea Construction's ROCE Trending?

The fact that Sun-Sea Construction is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 12% on its capital. Not only that, but the company is utilizing 21% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 67% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Key Takeaway

Long story short, we're delighted to see that Sun-Sea Construction's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a solid 44% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. 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 final note, we found 5 warning signs for Sun-Sea Construction (2 are potentially serious) you should be aware of.

While Sun-Sea Construction 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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