E&E RecyclingInc's (GTSM:8440) Returns On Capital Are Heading Higher

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in E&E RecyclingInc's (GTSM:8440) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for E&E RecyclingInc:

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

0.028 = NT$16m ÷ (NT$606m - NT$49m) (Based on the trailing twelve months to December 2020).

So, E&E RecyclingInc has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 6.5%.

Check out our latest analysis for E&E RecyclingInc

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

What Can We Tell From E&E RecyclingInc's ROCE Trend?

We're delighted to see that E&E RecyclingInc is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 2.8% which is a sight for sore eyes. Not only that, but the company is utilizing 25% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

The Key Takeaway

Long story short, we're delighted to see that E&E RecyclingInc's reinvestment activities have paid off and the company is now profitable. And with a respectable 56% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a final note, we found 3 warning signs for E&E RecyclingInc (1 is a bit concerning) you should be aware of.

While E&E RecyclingInc 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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