Should You Be Worried About Gloria Material Technology's (GTSM:5009) Returns On Capital?

What underlying fundamental trends can indicate that a company might be in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into Gloria Material Technology (GTSM:5009), we weren't too upbeat about how things were going.

Return On Capital Employed (ROCE): What is it?

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

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

0.01 = NT$179m ÷ (NT$20b - NT$3.0b) (Based on the trailing twelve months to September 2020).

Therefore, Gloria Material Technology has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 3.6%.

View our latest analysis for Gloria Material Technology

Above you can see how the current ROCE for Gloria Material Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Gloria Material Technology Tell Us?

In terms of Gloria Material Technology's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 7.4% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Gloria Material Technology becoming one if things continue as they have.

The Bottom Line On Gloria Material Technology's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. In spite of that, the stock has delivered a 5.6% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

On a final note, we found 3 warning signs for Gloria Material Technology (1 is significant) you should be aware of.

While Gloria Material 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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