Here's What's Concerning About POYA International's (GTSM:5904) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at POYA International (GTSM:5904) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on POYA International is:

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

0.15 = NT$2.7b ÷ (NT$23b - NT$6.0b) (Based on the trailing twelve months to December 2020).

Thus, POYA International has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 5.1% generated by the Multiline Retail industry.

Check out our latest analysis for POYA International

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

The Trend Of ROCE

When we looked at the ROCE trend at POYA International, we didn't gain much confidence. To be more specific, ROCE has fallen from 37% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, POYA International has decreased its current liabilities to 26% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On POYA International's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that POYA International is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 108% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One more thing, we've spotted 1 warning sign facing POYA International 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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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.
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