Some Investors May Be Worried About AIC's (GTSM:3693) Returns On Capital

What underlying fundamental trends can indicate that a company might be in decline? 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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after glancing at the trends within AIC (GTSM:3693), 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. The formula for this calculation on AIC is:

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

0.083 = NT$143m ÷ (NT$2.9b - NT$1.2b) (Based on the trailing twelve months to December 2020).

Thus, AIC has an ROCE of 8.3%. In absolute terms, that's a low return and it also under-performs the Tech industry average of 11%.

See our latest analysis for AIC

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 want to delve into the historical earnings, revenue and cash flow of AIC, check out these free graphs here.

The Trend Of ROCE

The trend of returns that AIC is generating are raising some concerns. Unfortunately, returns have declined substantially over the last five years to the 8.3% we see today. In addition to that, AIC is now employing 28% 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. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

On a side note, AIC's current liabilities have increased over the last five years to 41% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

In Conclusion...

In summary, it's unfortunate that AIC is shrinking its capital base and also generating lower returns. Investors haven't taken kindly to these developments, since the stock has declined 19% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking 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 can't be ignored!) that you should know about.

While AIC isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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