Slowing Rates Of Return At Cherng Tay Technology (GTSM:4767) Leave Little Room For Excitement

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Cherng Tay Technology (GTSM:4767) and its ROCE trend, we weren't exactly thrilled.

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 Cherng Tay Technology is:

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

0.08 = NT$83m ÷ (NT$1.3b - NT$287m) (Based on the trailing twelve months to September 2020).

So, Cherng Tay Technology has an ROCE of 8.0%. In absolute terms, that's a low return but it's around the Chemicals industry average of 6.8%.

Check out our latest analysis for Cherng Tay Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Cherng Tay Technology's ROCE against it's prior returns. If you're interested in investigating Cherng Tay Technology's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Cherng Tay Technology's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 8.0% for the last five years, and the capital employed within the business has risen 31% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a side note, Cherng Tay Technology has done well to reduce current liabilities to 22% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Key Takeaway

In conclusion, Cherng Tay Technology has been investing more capital into the business, but returns on that capital haven't increased. Unsurprisingly, the stock has only gained 2.9% over the last three years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One more thing to note, we've identified 2 warning signs with Cherng Tay Technology and understanding them should be part of your investment process.

While Cherng Tay 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.

If you decide to trade Cherng Tay Technology, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.