Universal Microwave Technology's (GTSM:3491) Returns On Capital Not Reflecting Well On The Business

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. However, after briefly looking over the numbers, we don't think Universal Microwave Technology (GTSM:3491) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Universal Microwave Technology is:

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

0.076 = NT$178m ÷ (NT$3.2b - NT$834m) (Based on the trailing twelve months to December 2020).

So, Universal Microwave Technology has an ROCE of 7.6%. Ultimately, that's a low return and it under-performs the Electronic industry average of 11%.

View our latest analysis for Universal Microwave Technology

Above you can see how the current ROCE for Universal Microwave Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Universal Microwave Technology Tell Us?

When we looked at the ROCE trend at Universal Microwave Technology, we didn't gain much confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 7.6%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Universal Microwave Technology have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 44% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One final note, you should learn about the 4 warning signs we've spotted with Universal Microwave Technology (including 1 which is a bit concerning) .

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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