Should We Be Excited About The Trends Of Returns At E&R Engineering (GTSM:8027)?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at E&R Engineering (GTSM:8027) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on E&R Engineering is:

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

0.04 = NT$59m ÷ (NT$2.4b - NT$951m) (Based on the trailing twelve months to September 2020).

Therefore, E&R Engineering has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 10%.

View our latest analysis for E&R Engineering

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

So How Is E&R Engineering's ROCE Trending?

There are better returns on capital out there than what we're seeing at E&R Engineering. Over the past five years, ROCE has remained relatively flat at around 4.0% and the business has deployed 50% more capital into its operations. 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.

The Bottom Line On E&R Engineering's ROCE

In conclusion, E&R Engineering has been investing more capital into the business, but returns on that capital haven't increased. Yet to long term shareholders the stock has gifted them an incredible 391% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a final note, we've found 1 warning sign for E&R Engineering that we think you should be aware of.

While E&R Engineering isn't earning the highest return, check out this free list of companies that are 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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