Returns On Capital - An Important Metric For Acer Cyber Security (GTSM:6690)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. So on that note, Acer Cyber Security (GTSM:6690) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

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 Acer Cyber Security, this is the formula:

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

0.16 = NT$100m ÷ (NT$923m - NT$301m) (Based on the trailing twelve months to December 2020).

So, Acer Cyber Security has an ROCE of 16%. By itself that's a normal return on capital and it's in line with the industry's average returns of 16%.

See our latest analysis for Acer Cyber Security

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 want to delve into the historical earnings, revenue and cash flow of Acer Cyber Security, check out these free graphs here.

The Trend Of ROCE

Acer Cyber Security has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 62%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Acer Cyber Security appears to been achieving more with less, since the business is using 70% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 33% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

What We Can Learn From Acer Cyber Security's ROCE

In summary, it's great to see that Acer Cyber Security has been able to turn things around and earn higher returns on lower amounts of capital. Since the stock has returned a solid 45% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you want to continue researching Acer Cyber Security, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Acer Cyber Security 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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