The Returns At Tatung System Technologies (GTSM:8099) Provide Us With Signs Of What's To Come

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. So, when we ran our eye over Tatung System Technologies' (GTSM:8099) trend of ROCE, we liked what we saw.

Understanding 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. The formula for this calculation on Tatung System Technologies is:

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

0.11 = NT$168m ÷ (NT$2.7b - NT$1.1b) (Based on the trailing twelve months to September 2020).

Thus, Tatung System Technologies has an ROCE of 11%. In absolute terms, that's a pretty standard return but compared to the IT industry average it falls behind.

Check out our latest analysis for Tatung System Technologies

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tatung System Technologies' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Tatung System Technologies, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 11% and the business has deployed 43% more capital into its operations. 11% is a pretty standard return, and it provides some comfort knowing that Tatung System Technologies has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

On a side note, Tatung System Technologies' current liabilities are still rather high at 43% 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.

In Conclusion...

To sum it up, Tatung System Technologies has simply been reinvesting capital steadily, at those decent rates of return. And the stock has done incredibly well with a 119% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

On a separate note, we've found 2 warning signs for Tatung System Technologies you'll probably want to know about.

While Tatung System Technologies 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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