Is There More Growth In Store For Wholetech System Hitech's (GTSM:3402) Returns On Capital?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Wholetech System Hitech (GTSM:3402) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Wholetech System Hitech is:

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 11% generated by the Semiconductor industry.

See 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's ROCE growth is quite impressive. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 130% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. 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 effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Wholetech System Hitech's ROCE

To sum it up, Wholetech System Hitech is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 158% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you'd like to know about the risks facing Wholetech System Hitech, we've discovered 2 warning signs that you should be aware of.

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