Acer Synergy Tech's (GTSM:6751) Returns On Capital Are Heading Higher

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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 Acer Synergy Tech's (GTSM:6751) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Acer Synergy Tech, this is the formula:

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

0.11 = NT$43m ÷ (NT$602m - NT$220m) (Based on the trailing twelve months to December 2020).

Therefore, Acer Synergy Tech has an ROCE of 11%. In isolation, that's a pretty standard return but against the IT industry average of 17%, it's not as good.

View our latest analysis for Acer Synergy Tech

In the above chart we have measured Acer Synergy Tech's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Acer Synergy Tech here for free.

So How Is Acer Synergy Tech's ROCE Trending?

The trends we've noticed at Acer Synergy Tech are quite reassuring. The data shows that returns on capital have increased substantially over the last three years to 11%. Basically the business is earning more per dollar of capital invested and in addition to that, 444% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

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 37% of the business, which is more than it was three years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

Our Take On Acer Synergy Tech's ROCE

To sum it up, Acer Synergy Tech has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with a respectable 41% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

One final note, you should learn about the 4 warning signs we've spotted with Acer Synergy Tech (including 1 which makes us a bit uncomfortable) .

While Acer Synergy Tech 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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