Stock Analysis

We Like These Underlying Trends At Higher Way Electronic (GTSM:3268)

TPEX:3268
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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So when we looked at Higher Way Electronic (GTSM:3268) and its trend of ROCE, we really liked what we saw.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Higher Way Electronic, this is the formula:

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

0.021 = NT$9.9m ÷ (NT$1.1b - NT$596m) (Based on the trailing twelve months to September 2020).

Therefore, Higher Way Electronic has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 11%.

See our latest analysis for Higher Way Electronic

roce
GTSM:3268 Return on Capital Employed March 2nd 2021

Historical performance is a great place to start when researching a stock so above you can see the gauge for Higher Way Electronic's ROCE against it's prior returns. If you're interested in investigating Higher Way Electronic's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

It's great to see that Higher Way Electronic has started to generate some pre-tax earnings from prior investments. While the business is profitable now, it used to be incurring losses on invested capital five years ago. Additionally, the business is utilizing 21% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 56% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

What We Can Learn From Higher Way Electronic's ROCE

In a nutshell, we're pleased to see that Higher Way Electronic has been able to generate higher returns from less capital. Since the stock has only returned 31% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Higher Way Electronic (of which 1 is potentially serious!) that you should know about.

While Higher Way Electronic 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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Valuation is complex, but we're here to simplify it.

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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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