Should We Be Excited About The Trends Of Returns At PADAUK Technology (GTSM:6716)?

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at PADAUK Technology (GTSM:6716), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

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. The formula for this calculation on PADAUK Technology is:

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

0.25 = NT$137m ÷ (NT$690m - NT$131m) (Based on the trailing twelve months to September 2020).

So, PADAUK Technology has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 10%.

View our latest analysis for PADAUK Technology

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

What Does the ROCE Trend For PADAUK Technology Tell Us?

We weren't thrilled with the trend because PADAUK Technology's ROCE has reduced by 23% over the last four years, while the business employed 93% more capital. Usually this isn't ideal, but given PADAUK Technology conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with PADAUK Technology's earnings and if they change as a result from the capital raise.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that PADAUK Technology is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 58% over the last year, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

One more thing to note, we've identified 3 warning signs with PADAUK Technology and understanding these should be part of your investment process.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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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