Should You Be Impressed By Advanced Ceramic X's (GTSM:3152) Returns on Capital?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So while Advanced Ceramic X (GTSM:3152) has a high ROCE right now, lets see what we can decipher from how returns are changing.

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. Analysts use this formula to calculate it for Advanced Ceramic X:

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

0.28 = NT$932m ÷ (NT$4.0b - NT$725m) (Based on the trailing twelve months to September 2020).

So, Advanced Ceramic X has an ROCE of 28%. In absolute terms that's a great return and it's even better than the Communications industry average of 9.8%.

See our latest analysis for Advanced Ceramic X

In the above chart we have measured Advanced Ceramic X's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Advanced Ceramic X.

The Trend Of ROCE

Things have been pretty stable at Advanced Ceramic X, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So while the current operations are delivering respectable returns, unless capital employed increases we'd be hard-pressed to believe it's a multi-bagger going forward.

In Conclusion...

In summary, Advanced Ceramic X isn't compounding its earnings but is generating decent returns on the same amount of capital employed. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 205% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing to note, we've identified 2 warning signs with Advanced Ceramic X and understanding these should be part of your investment process.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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