Our Take On The Returns On Capital At United Orthopedic (GTSM:4129)

There are a few key trends to look for if we want to identify the next multi-bagger. 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. However, after investigating United Orthopedic (GTSM:4129), we don't think it's current trends fit the mold of a multi-bagger.

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 United Orthopedic, this is the formula:

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

0.0052 = NT$20m ÷ (NT$5.6b - NT$1.6b) (Based on the trailing twelve months to September 2020).

So, United Orthopedic has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 12%.

See our latest analysis for United Orthopedic

Historical performance is a great place to start when researching a stock so above you can see the gauge for United Orthopedic's ROCE against it's prior returns. If you'd like to look at how United Orthopedic has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of United Orthopedic's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 13% over the last five years. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, United Orthopedic has decreased its current liabilities to 29% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On United Orthopedic's ROCE

In summary, United Orthopedic is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last five years, the stock has given away 40% 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.

United Orthopedic does have some risks, we noticed 4 warning signs (and 2 which don't sit too well with us) we think you should know about.

While United Orthopedic 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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