Here's What We Make Of Cen Link's (GTSM:5254) Returns On Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Cen Link (GTSM:5254), the trends above didn't look too great.

What is Return On Capital Employed (ROCE)?

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 Cen Link:

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

0.084 = NT$24m ÷ (NT$658m - NT$372m) (Based on the trailing twelve months to June 2020).

Thus, Cen Link has an ROCE of 8.4%. Ultimately, that's a low return and it under-performs the Electronic industry average of 11%.

See our latest analysis for Cen Link

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

What Does the ROCE Trend For Cen Link Tell Us?

In terms of Cen Link's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 15%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Cen Link to turn into a multi-bagger.

On a separate but related note, it's important to know that Cen Link has a current liabilities to total assets ratio of 57%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Cen Link's ROCE

In summary, it's unfortunate that Cen Link is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 13% from where it was year ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Cen Link does come with some risks though, we found 5 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

While Cen Link 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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