Should You Be Impressed By Pro-Hawk's (GTSM:8083) Returns on Capital?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, while the ROCE is currently high for Pro-Hawk (GTSM:8083), we aren't jumping out of our chairs because returns are decreasing.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on Pro-Hawk is:

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

0.40 = NT$445m ÷ (NT$1.8b - NT$682m) (Based on the trailing twelve months to September 2020).

Therefore, Pro-Hawk has an ROCE of 40%. In absolute terms that's a great return and it's even better than the Machinery industry average of 9.3%.

See our latest analysis for Pro-Hawk

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

What The Trend Of ROCE Can Tell Us

There hasn't been much to report for Pro-Hawk's returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So it may not be a multi-bagger in the making, but given the decent 40% return on capital, it'd be difficult to find fault with the business's current operations.

The Key Takeaway

In summary, Pro-Hawk isn't compounding its earnings but is generating decent returns on the same amount of capital employed. Since the stock has gained an impressive 99% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we found 3 warning signs for Pro-Hawk (1 is potentially serious) you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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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