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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. With that in mind, the ROCE of Genesis Technology (GTSM:6221) looks great, so lets see what the trend can tell us.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Genesis Technology, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.25 = NT$304m ÷ (NT$2.7b - NT$1.4b) (Based on the trailing twelve months to September 2020).
Therefore, Genesis Technology has an ROCE of 25%. That's a fantastic return and not only that, it outpaces the average of 19% earned by companies in a similar industry.
Check out our latest analysis for Genesis Technology
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Genesis Technology has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From Genesis Technology's ROCE Trend?
Investors would be pleased with what's happening at Genesis Technology. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 25%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital 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 effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.Our Take On Genesis Technology's ROCE
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. And a remarkable 184% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
If you'd like to know about the risks facing Genesis Technology, we've discovered 3 warning signs that you should be aware of.
Genesis Technology is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.
About TPEX:6221
Genesis Technology
Engages in sales, installation, and maintenance of information software, computer equipment, and telecommunications equipment, as well as information system integration services in Taiwan.
Flawless balance sheet established dividend payer.
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