How Well Is San Lien Technology (GTSM:5493) Allocating Its Capital?

When researching a stock for investment, what can tell us that the company is in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within San Lien Technology (GTSM:5493), we weren't too hopeful.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for San Lien Technology:

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

0.079 = NT$174m ÷ (NT$3.4b - NT$1.2b) (Based on the trailing twelve months to September 2020).

Therefore, San Lien Technology has an ROCE of 7.9%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 10%.

View our latest analysis for San Lien Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for San Lien Technology's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of San Lien Technology, check out these free graphs here.

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at San Lien Technology. To be more specific, the ROCE was 12% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on San Lien Technology becoming one if things continue as they have.

In Conclusion...

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 74% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a separate note, we've found 2 warning signs for San Lien Technology you'll probably want to 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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