Here's What's Concerning About WINSON Machinery (GTSM:4538)

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within WINSON Machinery (GTSM:4538), we weren't too hopeful.

What is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for WINSON Machinery:

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

0.024 = NT$16m ÷ (NT$729m - NT$44m) (Based on the trailing twelve months to September 2020).

Therefore, WINSON Machinery has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 3.6%.

Check out our latest analysis for WINSON Machinery

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 want to delve into the historical earnings, revenue and cash flow of WINSON Machinery, check out these free graphs here.

The Trend Of ROCE

There is reason to be cautious about WINSON Machinery, given the returns are trending downwards. About five years ago, returns on capital were 5.7%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on WINSON Machinery becoming one if things continue as they have.

The Bottom Line

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 46% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a separate note, we've found 2 warning signs for WINSON Machinery you'll probably want to know about.

While WINSON Machinery 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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