MARTAS Precision SlideLtd (GTSM:6705) Is Reinvesting At Lower Rates Of Return

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. However, after investigating MARTAS Precision SlideLtd (GTSM:6705), we don't think it's current trends fit the mold of a multi-bagger.

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 MARTAS Precision SlideLtd, this is the formula:

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

0.045 = NT$19m ÷ (NT$525m - NT$107m) (Based on the trailing twelve months to June 2020).

Therefore, MARTAS Precision SlideLtd has an ROCE of 4.5%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 9.2%.

See our latest analysis for MARTAS Precision SlideLtd

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

The Trend Of ROCE

On the surface, the trend of ROCE at MARTAS Precision SlideLtd doesn't inspire confidence. Over the last four years, returns on capital have decreased to 4.5% from 7.5% four years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On MARTAS Precision SlideLtd's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for MARTAS Precision SlideLtd have fallen, meanwhile the business is employing more capital than it was four years ago. Investors must expect better things on the horizon though because the stock has risen 3.1% in the last year. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 6 warning signs for MARTAS Precision SlideLtd (of which 1 shouldn't be ignored!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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