Should We Be Excited About The Trends Of Returns At Best Friend Technology (GTSM:5321)?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Best Friend Technology (GTSM:5321) and its ROCE trend, we weren't exactly thrilled.

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

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. To calculate this metric for Best Friend Technology, this is the formula:

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

0.0032 = NT$4.2m ÷ (NT$2.9b - NT$1.6b) (Based on the trailing twelve months to September 2020).

Therefore, Best Friend Technology has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Electronic industry average of 11%.

Check out our latest analysis for Best Friend Technology

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

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Best Friend Technology, we didn't gain much confidence. To be more specific, ROCE has fallen from 14% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a separate but related note, it's important to know that Best Friend Technology has a current liabilities to total assets ratio of 55%, 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.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Best Friend Technology is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 36% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you'd like to know more about Best Friend Technology, we've spotted 5 warning signs, and 2 of them are a bit concerning.

While Best Friend Technology 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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