The Returns At Scan-D (GTSM:6195) Provide Us With Signs Of What's To Come

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Although, when we looked at Scan-D (GTSM:6195), it didn't seem to tick all of these boxes.

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 Scan-D, this is the formula:

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

0.10 = NT$184m ÷ (NT$2.7b - NT$901m) (Based on the trailing twelve months to September 2020).

So, Scan-D has an ROCE of 10.0%. On its own, that's a low figure but it's around the 8.4% average generated by the Specialty Retail industry.

See our latest analysis for Scan-D

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

So How Is Scan-D's ROCE Trending?

When we looked at the ROCE trend at Scan-D, we didn't gain much confidence. To be more specific, ROCE has fallen from 22% 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 side note, Scan-D's current liabilities have increased over the last five years to 33% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Bottom Line On Scan-D's ROCE

While returns have fallen for Scan-D in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 29% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

On a final note, we found 4 warning signs for Scan-D (1 doesn't sit too well with us) you should be aware of.

While Scan-D 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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