Should You Be Impressed By GCS Holdings' (GTSM:4991) Returns on Capital?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at GCS Holdings (GTSM:4991) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on GCS Holdings is:

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

0.074 = NT$283m ÷ (NT$4.1b - NT$249m) (Based on the trailing twelve months to September 2020).

Thus, GCS Holdings has an ROCE of 7.4%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 10%.

See our latest analysis for GCS Holdings

Above you can see how the current ROCE for GCS Holdings 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 GCS Holdings here for free.

What Does the ROCE Trend For GCS Holdings Tell Us?

On the surface, the trend of ROCE at GCS Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 12% over the last five years. However it looks like GCS Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

In summary, GCS Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think GCS Holdings has the makings of a multi-bagger.

GCS Holdings does have some risks, we noticed 2 warning signs (and 1 which is potentially serious) we think you should know about.

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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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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