Kuo Toong International (GTSM:8936) Hasn't Managed To Accelerate Its Returns

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Kuo Toong International (GTSM:8936) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Kuo Toong International:

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

0.047 = NT$399m ÷ (NT$13b - NT$4.2b) (Based on the trailing twelve months to December 2020).

Therefore, Kuo Toong International has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Construction industry average of 8.0%.

Check out our latest analysis for Kuo Toong International

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 want to delve into the historical earnings, revenue and cash flow of Kuo Toong International, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

Things have been pretty stable at Kuo Toong International, with its capital employed and returns on that capital staying somewhat the same for the last 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. With that in mind, unless investment picks up again in the future, we wouldn't expect Kuo Toong International to be a multi-bagger going forward.

The Bottom Line On Kuo Toong International's ROCE

We can conclude that in regards to Kuo Toong International's returns on capital employed and the trends, there isn't much change to report on. Since the stock has gained an impressive 73% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Kuo Toong International does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is concerning...

While Kuo Toong International may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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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