Here's What To Make Of Materials Analysis Technology's (GTSM:3587) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. In light of that, when we looked at Materials Analysis Technology (GTSM:3587) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Materials Analysis Technology, this is the formula:

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

0.12 = NT$412m ÷ (NT$4.1b - NT$639m) (Based on the trailing twelve months to September 2020).

Thus, Materials Analysis Technology has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Semiconductor industry average of 10%.

See our latest analysis for Materials Analysis Technology

In the above chart we have measured Materials Analysis Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Materials Analysis Technology here for free.

What Can We Tell From Materials Analysis Technology's ROCE Trend?

When we looked at the ROCE trend at Materials Analysis Technology, we didn't gain much confidence. Around five years ago the returns on capital were 20%, but since then they've fallen to 12%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Materials Analysis Technology's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Materials Analysis Technology. Furthermore the stock has climbed 68% over the last five years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One more thing, we've spotted 2 warning signs facing Materials Analysis Technology that you might find interesting.

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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