United Orthopedic (GTSM:4129) Could Be Struggling To Allocate Capital

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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at United Orthopedic (GTSM:4129) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. 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)

0.023 = NT$90m ÷ (NT$5.6b - NT$1.7b) (Based on the trailing twelve months to December 2020).

So, United Orthopedic has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 10%.

See our latest analysis for United Orthopedic

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'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.

So How Is United Orthopedic's ROCE Trending?

In terms of United Orthopedic's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 9.2% 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.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by United Orthopedic's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 42% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think United Orthopedic has the makings of a multi-bagger.

If you'd like to know more about United Orthopedic, we've spotted 4 warning signs, and 1 of them shouldn't be ignored.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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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