If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Having said that, from a first glance at AEWIN TechnologiesLtd (GTSM:3564) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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. To calculate this metric for AEWIN TechnologiesLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.062 = NT$70m ÷ (NT$1.6b - NT$466m) (Based on the trailing twelve months to September 2020).
Therefore, AEWIN TechnologiesLtd has an ROCE of 6.2%. Ultimately, that's a low return and it under-performs the Software industry average of 19%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for AEWIN TechnologiesLtd's ROCE against it's prior returns. If you're interested in investigating AEWIN TechnologiesLtd's past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
When we looked at the ROCE trend at AEWIN TechnologiesLtd, we didn't gain much confidence. Around five years ago the returns on capital were 21%, but since then they've fallen to 6.2%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
While returns have fallen for AEWIN TechnologiesLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 48% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
AEWIN TechnologiesLtd does have some risks, we noticed 3 warning signs (and 1 which can't be ignored) we think you should know about.
While AEWIN TechnologiesLtd 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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