Is Dr. Wu Skincare (GTSM:6523) Likely To Turn Things Around?

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Although, when we looked at Dr. Wu Skincare (GTSM:6523), it didn't seem to tick all of these boxes.

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

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 Dr. Wu Skincare, this is the formula:

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

0.18 = NT$262m ÷ (NT$1.6b - NT$145m) (Based on the trailing twelve months to September 2020).

Therefore, Dr. Wu Skincare has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 14% generated by the Personal Products industry.

View our latest analysis for Dr. Wu Skincare

Historical performance is a great place to start when researching a stock so above you can see the gauge for Dr. Wu Skincare's ROCE against it's prior returns. If you're interested in investigating Dr. Wu Skincare's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Dr. Wu Skincare Tell Us?

On the surface, the trend of ROCE at Dr. Wu Skincare doesn't inspire confidence. To be more specific, ROCE has fallen from 28% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On Dr. Wu Skincare's ROCE

In summary, we're somewhat concerned by Dr. Wu Skincare's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 52% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Dr. Wu Skincare does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is concerning...

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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