Stock Analysis

Is There More Growth In Store For North-Star International's (GTSM:8927) Returns On Capital?

TPEX:8927
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There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 North-Star International (GTSM:8927) 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. The formula for this calculation on North-Star International is:

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

0.023 = NT$106m ÷ (NT$5.6b - NT$1.1b) (Based on the trailing twelve months to September 2020).

Thus, North-Star International has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 8.4%.

View our latest analysis for North-Star International

roce
GTSM:8927 Return on Capital Employed January 22nd 2021

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how North-Star International 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

The fact that North-Star International is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 2.3% on its capital. And unsurprisingly, like most companies trying to break into the black, North-Star International is utilizing 124% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

The Bottom Line

Long story short, we're delighted to see that North-Star International's reinvestment activities have paid off and the company is now profitable. And with a respectable 92% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing, we've spotted 1 warning sign facing North-Star International that you might find interesting.

While North-Star International may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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