Returns On Capital At CH Biotech R&D (GTSM:6534) Paint An Interesting Picture

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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 CH Biotech R&D (GTSM:6534), we don't think it's current trends fit the mold of a multi-bagger.

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

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. Analysts use this formula to calculate it for CH Biotech R&D:

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

0.043 = NT$111m ÷ (NT$3.2b - NT$639m) (Based on the trailing twelve months to June 2020).

So, CH Biotech R&D has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 6.7%.

See our latest analysis for CH Biotech R&D

Historical performance is a great place to start when researching a stock so above you can see the gauge for CH Biotech R&D's ROCE against it's prior returns. If you'd like to look at how CH Biotech R&D has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at CH Biotech R&D doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.3% from 35% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line

In summary, we're somewhat concerned by CH Biotech R&D's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 65% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we found 4 warning signs for CH Biotech R&D (2 make us uncomfortable) you should be aware of.

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