The Returns On Capital At Advanced Connection Technology (GTSM:3492) Don't Inspire Confidence

When researching a stock for investment, what can tell us that the company is in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after we looked into Advanced Connection Technology (GTSM:3492), the trends above didn't look too great.

Understanding 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. The formula for this calculation on Advanced Connection Technology is:

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).

Therefore, Advanced Connection Technology has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 10%.

Check out our latest analysis for Advanced Connection Technology

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Advanced Connection Technology has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Advanced Connection Technology's ROCE Trending?

We are a bit worried about the trend of returns on capital at Advanced Connection Technology. About five years ago, returns on capital were 14%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 side note, Advanced Connection Technology has done well to pay down its current liabilities to 31% of total assets. That could partly explain why the ROCE has dropped. 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

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Long term shareholders who've owned the stock over the last five years have experienced a 38% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Advanced Connection Technology does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

While Advanced Connection Technology 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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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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