Stock Analysis

Returns On Capital At Morn Sun Feed Mill (GTSM:1240) Paint A Concerning Picture

TPEX:1240
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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 Morn Sun Feed Mill (GTSM:1240), it didn't seem to tick all of these boxes.

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. To calculate this metric for Morn Sun Feed Mill, this is the formula:

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

0.041 = NT$54m ÷ (NT$1.9b - NT$582m) (Based on the trailing twelve months to December 2020).

So, Morn Sun Feed Mill has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Food industry average of 8.4%.

Check out our latest analysis for Morn Sun Feed Mill

roce
GTSM:1240 Return on Capital Employed March 28th 2021

In the above chart we have measured Morn Sun Feed Mill's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Morn Sun Feed Mill.

What Does the ROCE Trend For Morn Sun Feed Mill Tell Us?

When we looked at the ROCE trend at Morn Sun Feed Mill, we didn't gain much confidence. To be more specific, ROCE has fallen from 7.0% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Morn Sun Feed Mill has done well to pay down its current liabilities to 31% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

While returns have fallen for Morn Sun Feed Mill in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 8.1% over the last three years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

One more thing to note, we've identified 3 warning signs with Morn Sun Feed Mill and understanding these should be part of your investment process.

While Morn Sun Feed Mill 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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