Yeh-Chiang Technology (GTSM:6124) Might Have The Makings Of A Multi-Bagger

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. With that in mind, we've noticed some promising trends at Yeh-Chiang Technology (GTSM:6124) so let's look a bit deeper.

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. Analysts use this formula to calculate it for Yeh-Chiang Technology:

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

0.12 = NT$391m ÷ (NT$4.5b - NT$1.1b) (Based on the trailing twelve months to December 2020).

Thus, Yeh-Chiang Technology has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 7.5% it's much better.

See our latest analysis for Yeh-Chiang Technology

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 Yeh-Chiang Technology, check out these free graphs here.

What Can We Tell From Yeh-Chiang Technology's ROCE Trend?

We're delighted to see that Yeh-Chiang Technology is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 12% which is a sight for sore eyes. In addition to that, Yeh-Chiang Technology is employing 23% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 25% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Bottom Line

Long story short, we're delighted to see that Yeh-Chiang Technology's reinvestment activities have paid off and the company is now profitable. Considering the stock has delivered 18% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

While Yeh-Chiang Technology looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether 6124 is currently trading for a fair price.

While Yeh-Chiang 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.

If you’re looking to trade Yeh-Chiang Technology, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.