The Returns At Tian Zheng International Precision Machinery (GTSM:6654) Aren't Growing

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. In light of that, when we looked at Tian Zheng International Precision Machinery (GTSM:6654) and its ROCE trend, we weren't exactly thrilled.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Tian Zheng International Precision Machinery:

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

0.077 = NT$76m ÷ (NT$1.4b - NT$388m) (Based on the trailing twelve months to December 2020).

Thus, Tian Zheng International Precision Machinery has an ROCE of 7.7%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 11%.

See our latest analysis for Tian Zheng International Precision Machinery

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tian Zheng International Precision Machinery's ROCE against it's prior returns. If you'd like to look at how Tian Zheng International Precision Machinery has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Tian Zheng International Precision Machinery's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 7.7% for the last five years, and the capital employed within the business has risen 206% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From Tian Zheng International Precision Machinery's ROCE

In summary, Tian Zheng International Precision Machinery has simply been reinvesting capital and generating the same low rate of return as before. And investors may be recognizing these trends since the stock has only returned a total of 20% to shareholders over the last three years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Tian Zheng International Precision Machinery (of which 1 is a bit concerning!) that you should know about.

While Tian Zheng International Precision Machinery may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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