Should You Be Impressed By Advanced Wireless Semiconductor's (GTSM:8086) Returns on Capital?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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 Advanced Wireless Semiconductor (GTSM:8086) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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 Advanced Wireless Semiconductor:

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

0.10 = NT$782m ÷ (NT$8.3b - NT$645m) (Based on the trailing twelve months to September 2020).

Thus, Advanced Wireless Semiconductor has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Semiconductor industry average of 11%.

See our latest analysis for Advanced Wireless Semiconductor

Above you can see how the current ROCE for Advanced Wireless Semiconductor compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

We weren't thrilled with the trend because Advanced Wireless Semiconductor's ROCE has reduced by 74% over the last five years, while the business employed 159% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. Advanced Wireless Semiconductor probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a related note, Advanced Wireless Semiconductor has decreased its current liabilities to 7.7% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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

While returns have fallen for Advanced Wireless Semiconductor in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 168% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Advanced Wireless Semiconductor does have some risks, we noticed 4 warning signs (and 2 which are potentially serious) we think you should know about.

While Advanced Wireless Semiconductor 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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