There Are Reasons To Feel Uneasy About Great Tree Pharmacy's (GTSM:6469) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Great Tree Pharmacy (GTSM:6469) and its ROCE trend, we weren't exactly thrilled.

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 Great Tree Pharmacy, this is the formula:

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

0.059 = NT$225m ÷ (NT$6.0b - NT$2.2b) (Based on the trailing twelve months to December 2020).

Therefore, Great Tree Pharmacy has an ROCE of 5.9%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 7.5%.

Check out our latest analysis for Great Tree Pharmacy

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

So How Is Great Tree Pharmacy's ROCE Trending?

On the surface, the trend of ROCE at Great Tree Pharmacy doesn't inspire confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 5.9%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

While returns have fallen for Great Tree Pharmacy in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 185% to shareholders in the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

On a final note, we've found 2 warning signs for Great Tree Pharmacy that we think you should be aware of.

While Great Tree Pharmacy 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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