Be Wary Of Advanced Connection Technology (GTSM:3492) And Its Returns On Capital

What underlying fundamental trends can indicate that a company might be in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Advanced Connection Technology (GTSM:3492), we weren't too hopeful.

Understanding Return On Capital Employed (ROCE)

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 Connection Technology:

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

0.037 = NT$19m ÷ (NT$759m - NT$232m) (Based on the trailing twelve months to September 2020).

Thus, Advanced Connection Technology has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Electronic industry average of 11%.

Check out our latest analysis for Advanced Connection Technology

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

What Can We Tell From Advanced Connection Technology's ROCE Trend?

In terms of Advanced Connection Technology's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 14%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Advanced Connection Technology to turn into a multi-bagger.

On a related note, Advanced Connection Technology has decreased its current liabilities to 31% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Advanced Connection Technology's ROCE

In summary, it's unfortunate that Advanced Connection Technology is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 38% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing: We've identified 4 warning signs with Advanced Connection Technology (at least 1 which doesn't sit too well with us) , and understanding them would certainly be useful.

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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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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