Returns On Capital Tell Us A Lot About AIC (GTSM:3693)

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at AIC (GTSM:3693), so let's see why.

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. Analysts use this formula to calculate it for AIC:

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

0.095 = NT$165m ÷ (NT$2.9b - NT$1.2b) (Based on the trailing twelve months to September 2020).

Therefore, AIC has an ROCE of 9.5%. Ultimately, that's a low return and it under-performs the Tech industry average of 12%.

View our latest analysis for AIC

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

How Are Returns Trending?

We are a bit anxious about the trends of ROCE at AIC. Unfortunately, returns have declined substantially over the last five years to the 9.5% we see today. In addition to that, AIC is now employing 25% less capital than it was five years ago. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 40%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 9.5%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Bottom Line

To see AIC reducing the capital employed in the business in tandem with diminishing returns, is concerning. It should come as no surprise then that the stock has fallen 42% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for AIC (of which 1 shouldn't be ignored!) that you should 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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