Returns On Capital - An Important Metric For Kingstate Electronics (GTSM:3206)

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Kingstate Electronics (GTSM:3206) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Kingstate Electronics, this is the formula:

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

0.20 = NT$214m ÷ (NT$2.2b - NT$1.1b) (Based on the trailing twelve months to September 2020).

Therefore, Kingstate Electronics has an ROCE of 20%. On its own, that's a standard return, however it's much better than the 10% generated by the Electronic industry.

See our latest analysis for Kingstate Electronics

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

What Can We Tell From Kingstate Electronics' ROCE Trend?

Investors would be pleased with what's happening at Kingstate Electronics. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 20%. Basically the business is earning more per dollar of capital invested and in addition to that, 37% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

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 51% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

The Bottom Line

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Kingstate Electronics has. And a remarkable 135% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

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

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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