Investors Will Want King Polytechnic Engineering's (GTSM:6122) Growth In ROCE To Persist

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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 King Polytechnic Engineering's (GTSM:6122) returns on capital, so let's have a look.

What is 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 King Polytechnic Engineering is:

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

0.027 = NT$32m ÷ (NT$2.1b - NT$890m) (Based on the trailing twelve months to December 2020).

Therefore, King Polytechnic Engineering has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 8.0%.

See our latest analysis for King Polytechnic Engineering

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 want to delve into the historical earnings, revenue and cash flow of King Polytechnic Engineering, check out these free graphs here.

How Are Returns Trending?

We're delighted to see that King Polytechnic Engineering is reaping rewards from its investments and has now broken into profitability. The company now earns 2.7% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

On a separate but related note, it's important to know that King Polytechnic Engineering has a current liabilities to total assets ratio of 43%, which we'd consider pretty high. 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.

Our Take On King Polytechnic Engineering's ROCE

To sum it up, King Polytechnic Engineering is collecting higher returns from the same amount of capital, and that's impressive. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 98% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to continue researching King Polytechnic Engineering, you might be interested to know about the 3 warning signs that our analysis has discovered.

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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