Gallant Micro. Machining (GTSM:6640) Will Will Want To Turn Around Its Return Trends

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Gallant Micro. Machining (GTSM:6640), it didn't seem to tick all of these boxes.

What is 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. The formula for this calculation on Gallant Micro. Machining is:

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

0.013 = NT$16m ÷ (NT$2.0b - NT$732m) (Based on the trailing twelve months to December 2020).

So, Gallant Micro. Machining has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 11%.

See our latest analysis for Gallant Micro. Machining

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Gallant Micro. Machining has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Gallant Micro. Machining's ROCE Trend?

When we looked at the ROCE trend at Gallant Micro. Machining, we didn't gain much confidence. Around five years ago the returns on capital were 16%, but since then they've fallen to 1.3%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Gallant Micro. Machining's ROCE

While returns have fallen for Gallant Micro. Machining in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 70% to shareholders over the last three years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Gallant Micro. Machining does come with some risks though, we found 6 warning signs in our investment analysis, and 1 of those can't be ignored...

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.

If you decide to trade Gallant Micro. Machining, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.