Our Take On The Returns On Capital At Epoch Chemtronics (GTSM:3633)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Epoch Chemtronics (GTSM:3633) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Epoch Chemtronics:

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

0.15 = NT$176m ÷ (NT$2.4b - NT$1.2b) (Based on the trailing twelve months to June 2020).

So, Epoch Chemtronics has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 10% it's much better.

View our latest analysis for Epoch Chemtronics

Historical performance is a great place to start when researching a stock so above you can see the gauge for Epoch Chemtronics' ROCE against it's prior returns. If you'd like to look at how Epoch Chemtronics has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Epoch Chemtronics, we didn't gain much confidence. To be more specific, ROCE has fallen from 34% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Epoch Chemtronics has done well to pay down its current liabilities to 50% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Epoch Chemtronics' reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 107% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Epoch Chemtronics does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is concerning...

While Epoch Chemtronics 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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