Will Integrated Service Technology's (GTSM:3289) Growth In ROCE Persist?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. With that in mind, we've noticed some promising trends at Integrated Service Technology (GTSM:3289) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Integrated Service Technology is:

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

0.021 = NT$119m ÷ (NT$8.5b - NT$2.9b) (Based on the trailing twelve months to September 2020).

Thus, Integrated Service Technology has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 10%.

See our latest analysis for Integrated Service Technology

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're interested in investigating Integrated Service Technology's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Integrated Service Technology's ROCE Trend?

We're delighted to see that Integrated Service Technology is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 2.1% on its capital. And unsurprisingly, like most companies trying to break into the black, Integrated Service Technology is utilizing 151% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

The Bottom Line On Integrated Service Technology's ROCE

Long story short, we're delighted to see that Integrated Service Technology's reinvestment activities have paid off and the company is now profitable. And since the stock has fallen 38% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

One final note, you should learn about the 3 warning signs we've spotted with Integrated Service Technology (including 2 which is shouldn't be ignored) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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