Here's What's Concerning About Goodway Machine (TPE:1583)

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Basically the company is earning less on its investments and it is also reducing its total assets. On that note, looking into Goodway Machine (TPE:1583), we weren't too upbeat about how things were going.

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

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. To calculate this metric for Goodway Machine, this is the formula:

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

0.011 = NT$76m ÷ (NT$13b - NT$5.7b) (Based on the trailing twelve months to September 2020).

So, Goodway Machine has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 9.3%.

Check out our latest analysis for Goodway Machine

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

What Can We Tell From Goodway Machine's ROCE Trend?

We are a bit worried about the trend of returns on capital at Goodway Machine. About five years ago, returns on capital were 13%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Goodway Machine becoming one if things continue as they have.

On a side note, Goodway Machine's current liabilities are still rather high at 45% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. In spite of that, the stock has delivered a 21% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

On a final note, we found 4 warning signs for Goodway Machine (2 are a bit concerning) you should be aware of.

While Goodway Machine 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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