Returns On Capital - An Important Metric For Pontex PolyblendLtd (GTSM:8935)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. So when we looked at Pontex PolyblendLtd (GTSM:8935) and its trend of ROCE, we really liked what we saw.

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. To calculate this metric for Pontex PolyblendLtd, this is the formula:

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

0.0078 = NT$10.0m ÷ (NT$1.8b - NT$516m) (Based on the trailing twelve months to September 2020).

Therefore, Pontex PolyblendLtd has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 6.7%.

Check out our latest analysis for Pontex PolyblendLtd

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

The Trend Of ROCE

We're delighted to see that Pontex PolyblendLtd is reaping rewards from its investments and has now broken into profitability. The company now earns 0.8% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 29% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Key Takeaway

To sum it up, Pontex PolyblendLtd is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has fallen 11% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing, we've spotted 1 warning sign facing Pontex PolyblendLtd that you might find interesting.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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