What Can The Trends At Max Echo Technology (GTSM:5228) Tell Us About Their Returns?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Max Echo Technology (GTSM:5228) looks quite promising in regards to its trends of return on capital.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Max Echo Technology:

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

0.0082 = NT$8.2m ÷ (NT$1.2b - NT$206m) (Based on the trailing twelve months to June 2020).

So, Max Echo Technology has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Electronic industry average of 10%.

View our latest analysis for Max Echo 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 Max Echo Technology 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

Shareholders will be relieved that Max Echo Technology has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 0.8% on its capital. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

The Bottom Line On Max Echo Technology's ROCE

In summary, we're delighted to see that Max Echo Technology has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Astute investors may have an opportunity here because the stock has declined 25% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

One final note, you should learn about the 3 warning signs we've spotted with Max Echo Technology (including 2 which is are a bit unpleasant) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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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