The 25% Return On Capital At Genesis Technology (GTSM:6221) Got Our Attention

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Genesis Technology's (GTSM:6221) returns on capital, so let's have a look.

What is 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. The formula for this calculation on Genesis Technology is:

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

0.25 = NT$303m ÷ (NT$2.7b - NT$1.4b) (Based on the trailing twelve months to September 2020).

Therefore, Genesis Technology has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Software industry average of 18%.

Check out our latest analysis for Genesis Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Genesis Technology's ROCE against it's prior returns. If you're interested in investigating Genesis Technology's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Genesis Technology Tell Us?

Genesis Technology is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 25%. The amount of capital employed has increased too, by 91%. So we're very much inspired by what we're seeing at Genesis Technology thanks to its ability to profitably reinvest capital.

On a side note, Genesis Technology's current liabilities are still rather high at 54% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

In summary, it's great to see that Genesis Technology can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 268% 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.

Like most companies, Genesis Technology does come with some risks, and we've found 2 warning signs that you should be aware of.

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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