Returns On Capital At U-Best Innovative Technology (GTSM:4714) Paint An Interesting Picture

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating U-Best Innovative Technology (GTSM:4714), we don't think it's current trends fit the mold of a multi-bagger.

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 U-Best Innovative Technology:

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

0.016 = NT$23m ÷ (NT$2.0b - NT$574m) (Based on the trailing twelve months to September 2020).

So, U-Best Innovative Technology has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 6.9%.

View our latest analysis for U-Best Innovative Technology

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

The Trend Of ROCE

There are better returns on capital out there than what we're seeing at U-Best Innovative Technology. The company has consistently earned 1.6% for the last five years, and the capital employed within the business has risen 31% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 29% of total assets, this reported ROCE would probably be less than1.6% because total capital employed would be higher.The 1.6% ROCE could be even lower if current liabilities weren't 29% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.

The Key Takeaway

As we've seen above, U-Best Innovative Technology's returns on capital haven't increased but it is reinvesting in the business. Since the stock has gained an impressive 81% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

U-Best Innovative Technology does have some risks though, and we've spotted 3 warning signs for U-Best Innovative Technology that you might be interested in.

While U-Best Innovative 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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