Is DIVA Laboratories (GTSM:4153) Likely To Turn Things Around?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at DIVA Laboratories (GTSM:4153) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

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 DIVA Laboratories is:

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

0.086 = NT$85m ÷ (NT$1.3b - NT$277m) (Based on the trailing twelve months to September 2020).

Therefore, DIVA Laboratories has an ROCE of 8.6%. On its own, that's a low figure but it's around the 10% average generated by the Electronic industry.

Check out our latest analysis for DIVA Laboratories

Historical performance is a great place to start when researching a stock so above you can see the gauge for DIVA Laboratories' ROCE against it's prior returns. If you'd like to look at how DIVA Laboratories has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Over the past five years, DIVA Laboratories' ROCE has remained relatively flat while the business is using 23% less capital than before. To us that doesn't look like a multi-bagger because the company appears to be selling assets and it's returns aren't increasing. In addition to that, since the ROCE doesn't scream "quality" at 8.6%, it's hard to get excited about these developments.

In Conclusion...

Overall, we're not ecstatic to see DIVA Laboratories reducing the amount of capital it employs in the business. And in the last five years, the stock has given away 63% so the market doesn't look too hopeful on these trends strengthening any time soon. 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.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for DIVA Laboratories (of which 1 can't be ignored!) that you should know about.

While DIVA Laboratories 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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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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