Should You Be Impressed By Morn Sun Feed Mill's (GTSM:1240) Returns on Capital?

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. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Morn Sun Feed Mill (GTSM:1240) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Morn Sun Feed Mill:

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

0.054 = NT$66m ÷ (NT$1.8b - NT$587m) (Based on the trailing twelve months to September 2020).

Thus, Morn Sun Feed Mill has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Food industry average of 8.5%.

See our latest analysis for Morn Sun Feed Mill

Above you can see how the current ROCE for Morn Sun Feed Mill compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

In terms of Morn Sun Feed Mill's historical ROCE trend, it doesn't exactly demand attention. The company has employed 74% more capital in the last four years, and the returns on that capital have remained stable at 5.4%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, Morn Sun Feed Mill has done well to reduce current liabilities to 32% of total assets over the last four years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

What We Can Learn From Morn Sun Feed Mill's ROCE

In summary, Morn Sun Feed Mill has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has gained an impressive 32% over the last three years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we've found 3 warning signs for Morn Sun Feed Mill that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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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