Longwell's (GTSM:6290) Returns On Capital Are Heading Higher

What trends should we look for it we want to identify stocks that can 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Longwell (GTSM:6290) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Longwell, this is the formula:

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

0.16 = NT$769m ÷ (NT$6.7b - NT$1.9b) (Based on the trailing twelve months to December 2020).

Thus, Longwell has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 7.7% generated by the Electrical industry.

View our latest analysis for Longwell

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

The Trend Of ROCE

We like the trends that we're seeing from Longwell. The data shows that returns on capital have increased substantially over the last five years to 16%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 25%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Key Takeaway

In summary, it's great to see that Longwell can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Longwell can keep these trends up, it could have a bright future ahead.

On a separate note, we've found 3 warning signs for Longwell you'll probably want to know about.

While Longwell 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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