Here’s What’s Happening With Returns At Wholetech System Hitech (GTSM:3402)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Wholetech System Hitech's (GTSM:3402) returns on capital, so let's have a look.

Understanding 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. Analysts use this formula to calculate it for Wholetech System Hitech:

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

0.19 = NT$286m ÷ (NT$2.9b - NT$1.4b) (Based on the trailing twelve months to September 2020).

Thus, Wholetech System Hitech has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 10% generated by the Semiconductor industry.

View our latest analysis for Wholetech System Hitech

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 want to delve into the historical earnings, revenue and cash flow of Wholetech System Hitech, check out these free graphs here.

So How Is Wholetech System Hitech's ROCE Trending?

Wholetech System Hitech is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 130% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

On a side note, Wholetech System Hitech's current liabilities are still rather high at 49% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

To bring it all together, Wholetech System Hitech has done well to increase the returns it's generating from its capital employed. Since the stock has returned a staggering 227% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Wholetech System Hitech can keep these trends up, it could have a bright future ahead.

On a separate note, we've found 2 warning signs for Wholetech System Hitech you'll probably want to know about.

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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