Should We Be Excited About The Trends Of Returns At UltraChip (GTSM:3141)?

What trends should we look for it we want to identify stocks that can 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. However, after briefly looking over the numbers, we don't think UltraChip (GTSM:3141) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for UltraChip:

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

0.078 = NT$95m ÷ (NT$1.5b - NT$330m) (Based on the trailing twelve months to September 2020).

So, UltraChip has an ROCE of 7.8%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 10%.

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.

What Can We Tell From UltraChip's ROCE Trend?

Over the past five years, UltraChip's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect UltraChip to be a multi-bagger going forward.

The Bottom Line

In summary, UltraChip isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Yet to long term shareholders the stock has gifted them an incredible 103% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you'd like to know more about UltraChip, we've spotted 2 warning signs, and 1 of them is significant.

While UltraChip 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.

If you decide to trade UltraChip, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.