Returns On Capital At Cypress TechnologyLtd (GTSM:3541) Paint An Interesting Picture

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Looking at Cypress TechnologyLtd (GTSM:3541), it does have a high ROCE right now, but lets see how returns are trending.

What is 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 Cypress TechnologyLtd:

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

0.29 = NT$273m ÷ (NT$1.6b - NT$611m) (Based on the trailing twelve months to September 2020).

Therefore, Cypress TechnologyLtd has an ROCE of 29%. That's a fantastic return and not only that, it outpaces the average of 11% earned by companies in a similar industry.

See our latest analysis for Cypress TechnologyLtd

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 Cypress TechnologyLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Cypress TechnologyLtd Tell Us?

There hasn't been much to report for Cypress TechnologyLtd's returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So it may not be a multi-bagger in the making, but given the decent 29% return on capital, it'd be difficult to find fault with the business's current operations.

The Bottom Line

While Cypress TechnologyLtd has impressive profitability from its capital, it isn't increasing that amount of capital. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Like most companies, Cypress TechnologyLtd does come with some risks, and we've found 3 warning signs that you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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