Will The ROCE Trend At UVAT Technology (GTSM:3580) Continue?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, UVAT Technology (GTSM:3580) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on UVAT Technology is:

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

0.12 = NT$80m ÷ (NT$1.1b - NT$450m) (Based on the trailing twelve months to September 2020).

So, UVAT Technology has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 11% generated by the Semiconductor industry.

View our latest analysis for UVAT Technology

Above you can see how the current ROCE for UVAT Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering UVAT Technology here for free.

What The Trend Of ROCE Can Tell Us

UVAT Technology has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 12% which is a sight for sore eyes. In addition to that, UVAT Technology is employing 35% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a separate but related note, it's important to know that UVAT Technology has a current liabilities to total assets ratio of 41%, which we'd consider pretty high. 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.

The Bottom Line On UVAT Technology's ROCE

Long story short, we're delighted to see that UVAT Technology's reinvestment activities have paid off and the company is now profitable. And a remarkable 255% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if UVAT Technology can keep these trends up, it could have a bright future ahead.

If you want to continue researching UVAT Technology, you might be interested to know about the 3 warning signs that our analysis has discovered.

While UVAT Technology 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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