We Like These Underlying Return On Capital Trends At GEM Terminal IndustryLtd (TPE:2460)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Speaking of which, we noticed some great changes in GEM Terminal IndustryLtd's (TPE:2460) returns on capital, so let's have a look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for GEM Terminal IndustryLtd:

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

0.012 = NT$34m ÷ (NT$5.2b - NT$2.3b) (Based on the trailing twelve months to December 2020).

So, GEM Terminal IndustryLtd has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 7.6%.

View our latest analysis for GEM Terminal IndustryLtd

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

What Can We Tell From GEM Terminal IndustryLtd's ROCE Trend?

It's great to see that GEM Terminal IndustryLtd has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 1.2% which is no doubt a relief for some early shareholders. In regards to capital employed, GEM Terminal IndustryLtd is using 33% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. GEM Terminal IndustryLtd could be selling under-performing assets since the ROCE is improving.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 45% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

In Conclusion...

In summary, it's great to see that GEM Terminal IndustryLtd has been able to turn things around and earn higher returns on lower amounts of capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing: We've identified 2 warning signs with GEM Terminal IndustryLtd (at least 1 which is concerning) , and understanding these would certainly be useful.

While GEM Terminal IndustryLtd 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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