Will Est Global ApparelLtd's (GTSM:4413) Growth In ROCE Persist?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. So when we looked at Est Global ApparelLtd (GTSM:4413) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Est Global ApparelLtd:

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

0.04 = NT$12m ÷ (NT$332m - NT$25m) (Based on the trailing twelve months to September 2020).

Therefore, Est Global ApparelLtd has an ROCE of 4.0%. Even though it's in line with the industry average of 4.0%, it's still a low return by itself.

Check out our latest analysis for Est Global ApparelLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Est Global ApparelLtd's ROCE against it's prior returns. If you'd like to look at how Est Global ApparelLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Est Global ApparelLtd's ROCE Trending?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 4.0%. The amount of capital employed has increased too, by 558%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

One more thing to note, Est Global ApparelLtd has decreased current liabilities to 7.6% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line

In summary, it's great to see that Est Global ApparelLtd can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Given the stock has declined 18% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Est Global ApparelLtd (of which 1 doesn't sit too well with us!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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