What Do The Returns On Capital At Daily Polymer (GTSM:4716) Tell Us?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Daily Polymer (GTSM:4716), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Daily Polymer is:

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

0.035 = NT$39m ÷ (NT$1.6b - NT$512m) (Based on the trailing twelve months to September 2020).

So, Daily Polymer has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 6.9%.

View our latest analysis for Daily Polymer

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

So How Is Daily Polymer's ROCE Trending?

Over the past five years, Daily Polymer's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at Daily Polymer in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 31% of total assets, this reported ROCE would probably be less than3.5% because total capital employed would be higher.The 3.5% ROCE could be even lower if current liabilities weren't 31% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.

In Conclusion...

In a nutshell, Daily Polymer has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has gained an impressive 71% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we found 4 warning signs for Daily Polymer (1 is a bit concerning) you should be aware of.

While Daily Polymer may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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