There Are Reasons To Feel Uneasy About Renjie Oldsichuan Catering Management Consultant's (GTSM:2741) Returns On Capital

What are the early trends we should look for to identify a stock that could 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. However, after briefly looking over the numbers, we don't think Renjie Oldsichuan Catering Management Consultant (GTSM:2741) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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 Renjie Oldsichuan Catering Management Consultant, this is the formula:

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

0.059 = NT$45m ÷ (NT$1.1b - NT$289m) (Based on the trailing twelve months to June 2020).

So, Renjie Oldsichuan Catering Management Consultant has an ROCE of 5.9%. Even though it's in line with the industry average of 5.9%, it's still a low return by itself.

Check out our latest analysis for Renjie Oldsichuan Catering Management Consultant

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Renjie Oldsichuan Catering Management Consultant, check out these free graphs here.

What Does the ROCE Trend For Renjie Oldsichuan Catering Management Consultant Tell Us?

In terms of Renjie Oldsichuan Catering Management Consultant's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 5.9% from 20% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Renjie Oldsichuan Catering Management Consultant's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 31% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a final note, we've found 4 warning signs for Renjie Oldsichuan Catering Management Consultant that we think you should be aware of.

While Renjie Oldsichuan Catering Management Consultant 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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