We Like These Underlying Trends At E&E RecyclingInc (GTSM:8440)

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at E&E RecyclingInc (GTSM:8440) so let's look a bit deeper.

What is 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. To calculate this metric for E&E RecyclingInc, this is the formula:

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

0.035 = NT$19m ÷ (NT$586m - NT$38m) (Based on the trailing twelve months to September 2020).

Thus, E&E RecyclingInc has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 5.0%.

Check out our latest analysis for E&E RecyclingInc

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're interested in investigating E&E RecyclingInc's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For E&E RecyclingInc Tell Us?

E&E RecyclingInc has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 3.5% on its capital. Not only that, but the company is utilizing 23% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

The Bottom Line On E&E RecyclingInc's ROCE

Long story short, we're delighted to see that E&E RecyclingInc's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a solid 57% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if E&E RecyclingInc can keep these trends up, it could have a bright future ahead.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for E&E RecyclingInc (of which 1 doesn't sit too well with us!) that you should know about.

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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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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