We Like Transcom's (GTSM:5222) Returns And Here's How They're Trending

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. So when we looked at the ROCE trend of Transcom (GTSM:5222) we really liked what we saw.

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. Analysts use this formula to calculate it for Transcom:

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

0.31 = NT$194m ÷ (NT$811m - NT$181m) (Based on the trailing twelve months to June 2020).

So, Transcom has an ROCE of 31%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 11%.

See our latest analysis for Transcom

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

What Does the ROCE Trend For Transcom Tell Us?

Transcom 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 31% which is a sight for sore eyes. Not only that, but the company is utilizing 480% more capital than before, but that's to be expected from a company 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 related note, the company's ratio of current liabilities to total assets has decreased to 22%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Transcom has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line On Transcom's ROCE

To the delight of most shareholders, Transcom has now broken into profitability. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Like most companies, Transcom does come with some risks, and we've found 2 warning signs that you should be aware of.

Transcom is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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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