Here's What To Make Of Taiwan FamilyMart's (GTSM:5903) Returns On Capital

November 24, 2020

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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Taiwan FamilyMart (GTSM:5903), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Taiwan FamilyMart, this is the formula:

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

0.093 = NT$2.8b ÷ (NT$60b - NT$30b) (Based on the trailing twelve months to September 2020).

So, Taiwan FamilyMart has an ROCE of 9.3%. In absolute terms, that's a low return, but it's much better than the Consumer Retailing industry average of 7.2%.

Check out our latest analysis for Taiwan FamilyMart

Above you can see how the current ROCE for Taiwan FamilyMart compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Taiwan FamilyMart.

How Are Returns Trending?

When we looked at the ROCE trend at Taiwan FamilyMart, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.3% from 17% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Taiwan FamilyMart has decreased its current liabilities to 50% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 50% is still pretty high, so those risks are still somewhat prevalent.

Our Take On Taiwan FamilyMart's ROCE

While returns have fallen for Taiwan FamilyMart in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 47% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you're still interested in Taiwan FamilyMart it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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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