Should We Be Excited About The Trends Of Returns At Techcential International (GTSM:6616)?

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Techcential International (GTSM:6616) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. Analysts use this formula to calculate it for Techcential International:

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

0.14 = NT$89m ÷ (NT$914m - NT$273m) (Based on the trailing twelve months to September 2020).

Therefore, Techcential International has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Consumer Durables industry average of 10% it's much better.

View our latest analysis for Techcential International

In the above chart we have measured Techcential International's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Techcential International's ROCE Trend?

On the surface, the trend of ROCE at Techcential International doesn't inspire confidence. Over the last five years, returns on capital have decreased to 14% from 39% five years ago. 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.

What We Can Learn From Techcential International's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Techcential International have fallen, meanwhile the business is employing more capital than it was five years ago. But investors must be expecting an improvement of sorts because over the last three yearsthe stock has delivered a respectable 81% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you want to continue researching Techcential International, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Techcential International 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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