Should You Be Impressed By Toung Loong Textile MFG's (GTSM:4401) Returns on Capital?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Toung Loong Textile MFG (GTSM:4401) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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. To calculate this metric for Toung Loong Textile MFG, this is the formula:

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

0.023 = NT$87m ÷ (NT$6.1b - NT$2.4b) (Based on the trailing twelve months to September 2020).

Therefore, Toung Loong Textile MFG has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 4.0%.

Check out our latest analysis for Toung Loong Textile MFG

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 Toung Loong Textile MFG's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Toung Loong Textile MFG's ROCE Trending?

When we looked at the ROCE trend at Toung Loong Textile MFG, we didn't gain much confidence. Around five years ago the returns on capital were 21%, but since then they've fallen to 2.3%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line

In summary, we're somewhat concerned by Toung Loong Textile MFG's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 63% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Toung Loong Textile MFG does have some risks, we noticed 4 warning signs (and 2 which can't be ignored) we think you should know about.

While Toung Loong Textile MFG 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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