Stock Analysis

There's Been No Shortage Of Growth Recently For Azion's (GTSM:6148) Returns On Capital

TPEX:6148
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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Azion (GTSM:6148) looks quite promising in regards to its trends of return on capital.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Azion is:

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

0.072 = NT$49m ÷ (NT$996m - NT$320m) (Based on the trailing twelve months to December 2020).

So, Azion has an ROCE of 7.2%. Ultimately, that's a low return and it under-performs the IT industry average of 17%.

See our latest analysis for Azion

roce
GTSM:6148 Return on Capital Employed April 23rd 2021

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

What The Trend Of ROCE Can Tell Us

You'd find it hard not to be impressed with the ROCE trend at Azion. The data shows that returns on capital have increased by 47% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 54% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

On a related note, the company's ratio of current liabilities to total assets has decreased to 32%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line On Azion's ROCE

In the end, Azion has proven it's capital allocation skills are good with those higher returns from less amount of capital. Since the stock has returned a staggering 244% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a final note, we found 5 warning signs for Azion (1 is a bit concerning) you should be aware of.

While Azion 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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