Is Globe Union Industrial (TPE:9934) Struggling?

When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don't look too good at Globe Union Industrial (TPE:9934), so let's see why.

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. The formula for this calculation on Globe Union Industrial is:

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

0.024 = NT$240m ÷ (NT$16b - NT$6.2b) (Based on the trailing twelve months to September 2020).

So, Globe Union Industrial has an ROCE of 2.4%. On its own, that's a low figure but it's around the 2.8% average generated by the Building industry.

Check out our latest analysis for Globe Union Industrial

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

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at Globe Union Industrial. To be more specific, the ROCE was 4.3% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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. If these trends continue, we wouldn't expect Globe Union Industrial to turn into a multi-bagger.

The Bottom Line On Globe Union Industrial's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. However the stock has delivered a 53% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you want to know some of the risks facing Globe Union Industrial we've found 3 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

While Globe Union Industrial 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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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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