Will Solar Applied Materials Technology's (GTSM:1785) Growth In ROCE Persist?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Solar Applied Materials Technology (GTSM:1785) so let's look a bit deeper.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Solar Applied Materials Technology is:

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

0.067 = NT$1.3b ÷ (NT$21b - NT$2.2b) (Based on the trailing twelve months to September 2020).

So, Solar Applied Materials Technology has an ROCE of 6.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.7%.

View our latest analysis for Solar Applied Materials Technology

In the above chart we have measured Solar Applied Materials Technology's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

Solar Applied Materials Technology has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 6.7% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Solar Applied Materials Technology is utilizing 126% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

One more thing to note, Solar Applied Materials Technology has decreased current liabilities to 11% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

What We Can Learn From Solar Applied Materials Technology's ROCE

In summary, it's great to see that Solar Applied Materials Technology has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a staggering 127% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Solar Applied Materials Technology does have some risks, we noticed 2 warning signs (and 1 which is a bit concerning) we think you should know about.

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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