Is Single Well Industrial (GTSM:3490) Set To Make A Turnaround?

What underlying fundamental trends can indicate that a company might be in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into Single Well Industrial (GTSM:3490), we weren't too upbeat about how things were going.

What is 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. The formula for this calculation on Single Well Industrial is:

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

0.0007 = NT$950k ÷ (NT$1.6b - NT$240m) (Based on the trailing twelve months to September 2020).

Therefore, Single Well Industrial has an ROCE of 0.07%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 10%.

View our latest analysis for Single Well Industrial

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

What The Trend Of ROCE Can Tell Us

In terms of Single Well Industrial's historical ROCE trend, it isn't fantastic. Unfortunately, returns have declined substantially over the last five years to the 0.07% we see today. On top of that, the business is utilizing 28% less capital within its operations. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

On a related note, Single Well Industrial has decreased its current liabilities to 15% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Single Well Industrial's ROCE

In summary, it's unfortunate that Single Well Industrial is shrinking its capital base and also generating lower returns. Long term shareholders who've owned the stock over the last five years have experienced a 53% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Single Well Industrial (including 1 which is potentially serious) .

While Single Well Industrial isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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