Arich Enterprise (GTSM:4173) Might Be Having Difficulty Using Its Capital Effectively

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Arich Enterprise (GTSM:4173) and its ROCE trend, we weren't exactly thrilled.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Arich Enterprise, this is the formula:

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

0.025 = NT$48m ÷ (NT$3.9b - NT$2.0b) (Based on the trailing twelve months to December 2020).

So, Arich Enterprise has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 8.0%.

View our latest analysis for Arich Enterprise

Historical performance is a great place to start when researching a stock so above you can see the gauge for Arich Enterprise's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Arich Enterprise, check out these free graphs here.

How Are Returns Trending?

On the surface, the trend of ROCE at Arich Enterprise doesn't inspire confidence. Around five years ago the returns on capital were 5.9%, but since then they've fallen to 2.5%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Arich Enterprise has decreased its current liabilities to 51% 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. Keep in mind 51% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line On Arich Enterprise's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Arich Enterprise is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 4.2% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Arich Enterprise does have some risks, we noticed 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

While Arich Enterprise 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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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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