Will the Promising Trends At Yen Sun Technology (GTSM:6275) Continue?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. So when we looked at Yen Sun Technology (GTSM:6275) and its trend of ROCE, we really liked what we saw.

Understanding 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. To calculate this metric for Yen Sun Technology, this is the formula:

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

0.092 = NT$138m ÷ (NT$2.6b - NT$1.1b) (Based on the trailing twelve months to September 2020).

Therefore, Yen Sun Technology has an ROCE of 9.2%. On its own, that's a low figure but it's around the 10% average generated by the Consumer Durables industry.

View our latest analysis for Yen Sun Technology

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

What Does the ROCE Trend For Yen Sun Technology Tell Us?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 9.2%. Basically the business is earning more per dollar of capital invested and in addition to that, 99% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 43%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

What We Can Learn From Yen Sun Technology's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Yen Sun Technology has. Since the stock has returned a staggering 138% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Yen Sun Technology can keep these trends up, it could have a bright future ahead.

Yen Sun Technology does have some risks though, and we've spotted 3 warning signs for Yen Sun Technology that you might be interested in.

While Yen Sun Technology 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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