Returns On Capital - An Important Metric For Tera Autotech (GTSM:6234)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So on that note, Tera Autotech (GTSM:6234) looks quite promising in regards to its trends of return on capital.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Tera Autotech is:

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

0.064 = NT$162m ÷ (NT$4.0b - NT$1.5b) (Based on the trailing twelve months to September 2020).

So, Tera Autotech has an ROCE of 6.4%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 9.3%.

View our latest analysis for Tera Autotech

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 Tera Autotech has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Tera Autotech's ROCE Trending?

Tera Autotech is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 136% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

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 37% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Key Takeaway

In summary, we're delighted to see that Tera Autotech has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with a respectable 82% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. 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.

One more thing: We've identified 2 warning signs with Tera Autotech (at least 1 which is potentially serious) , and understanding these would certainly be useful.

While Tera Autotech 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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