Here’s What’s Happening With Returns At Tech-Top Engineering (GTSM:6750)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Tech-Top Engineering's (GTSM:6750) returns on capital, so let's have a look.

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 Tech-Top Engineering, this is the formula:

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

0.10 = NT$46m ÷ (NT$1.4b - NT$942m) (Based on the trailing twelve months to June 2020).

Therefore, Tech-Top Engineering has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 7.5% it's much better.

See our latest analysis for Tech-Top Engineering

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

How Are Returns Trending?

We're delighted to see that Tech-Top Engineering is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making three years ago but is is now generating 10% on its capital. Not only that, but the company is utilizing 47% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

Another thing to note, Tech-Top Engineering has a high ratio of current liabilities to total assets of 68%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Tech-Top Engineering's ROCE

To the delight of most shareholders, Tech-Top Engineering has now broken into profitability. Since the stock has returned a solid 51% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Tech-Top Engineering does have some risks, we noticed 5 warning signs (and 2 which don't sit too well with us) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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