Is Highlight Tech (GTSM:6208) Likely To Turn Things Around?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. However, after briefly looking over the numbers, we don't think Highlight Tech (GTSM:6208) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Highlight Tech, this is the formula:

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

0.078 = NT$261m ÷ (NT$4.8b - NT$1.5b) (Based on the trailing twelve months to September 2020).

So, Highlight Tech has an ROCE of 7.8%. In absolute terms, that's a low return but it's around the Machinery industry average of 9.4%.

View our latest analysis for Highlight Tech

Historical performance is a great place to start when researching a stock so above you can see the gauge for Highlight Tech's ROCE against it's prior returns. If you're interested in investigating Highlight Tech's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

The returns on capital haven't changed much for Highlight Tech in recent years. The company has consistently earned 7.8% for the last five years, and the capital employed within the business has risen 91% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line On Highlight Tech's ROCE

In summary, Highlight Tech has simply been reinvesting capital and generating the same low rate of return as before. Yet to long term shareholders the stock has gifted them an incredible 360% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One final note, you should learn about the 4 warning signs we've spotted with Highlight Tech (including 1 which is a bit concerning) .

While Highlight Tech 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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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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