The Returns At Powertip Technology (GTSM:6167) Provide Us With Signs Of What's To Come

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. However, after briefly looking over the numbers, we don't think Powertip Technology (GTSM:6167) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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 Powertip Technology:

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

0.037 = NT$60m ÷ (NT$1.9b - NT$260m) (Based on the trailing twelve months to September 2020).

So, Powertip Technology has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 11%.

Check out our latest analysis for Powertip Technology

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

What Does the ROCE Trend For Powertip Technology Tell Us?

In terms of Powertip Technology's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 5.8%, but since then they've fallen to 3.7%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Powertip Technology has done well to pay down its current liabilities to 14% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Powertip Technology's ROCE

In summary, we're somewhat concerned by Powertip Technology's diminishing returns on increasing amounts of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 46% 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 Powertip 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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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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