Returns On Capital At Chitec Technology (GTSM:3430) Paint A Concerning Picture

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into Chitec Technology (GTSM:3430), the trends above didn't look too great.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Chitec Technology is:

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

0.011 = NT$8.1m ÷ (NT$1.2b - NT$511m) (Based on the trailing twelve months to June 2020).

So, Chitec Technology has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 6.8%.

See our latest analysis for Chitec Technology

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

The Trend Of ROCE

In terms of Chitec Technology's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 5.8% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Chitec Technology becoming one if things continue as they have.

On a side note, Chitec Technology's current liabilities are still rather high at 42% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Chitec Technology's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Yet despite these poor fundamentals, the stock has gained a huge 109% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Chitec Technology does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

While Chitec Technology 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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