Has UltraChip (GTSM:3141) Got What It Takes To Become A Multi-Bagger?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at UltraChip (GTSM:3141) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

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 UltraChip, this is the formula:

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

0.088 = NT$143m ÷ (NT$2.0b - NT$421m) (Based on the trailing twelve months to December 2020).

So, UltraChip has an ROCE of 8.8%. On its own, that's a low figure but it's around the 10% average generated by the Semiconductor industry.

Check out our latest analysis for UltraChip

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

The Trend Of ROCE

The returns on capital haven't changed much for UltraChip in recent years. The company has employed 97% more capital in the last five years, and the returns on that capital have remained stable at 8.8%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Key Takeaway

Long story short, while UltraChip has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 95% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing: We've identified 2 warning signs with UltraChip (at least 1 which makes us a bit uncomfortable) , and understanding these would certainly be useful.

While UltraChip 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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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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