We Like These Underlying Trends At AVY Precision Technology (GTSM:5392)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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 when we looked at AVY Precision Technology (GTSM:5392) and its trend of ROCE, we really liked what we saw.

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 AVY Precision Technology is:

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

0.0067 = NT$58m ÷ (NT$15b - NT$6.6b) (Based on the trailing twelve months to September 2020).

So, AVY Precision Technology has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Electronic industry average of 10%.

Check out our latest analysis for AVY Precision Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for AVY Precision Technology's ROCE against it's prior returns. If you're interested in investigating AVY Precision Technology's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

AVY Precision Technology has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 0.7% on its capital. Not only that, but the company is utilizing 30% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 43% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

The Bottom Line

To the delight of most shareholders, AVY Precision Technology has now broken into profitability. And since the stock has fallen 31% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing, we've spotted 2 warning signs facing AVY Precision Technology that you might find interesting.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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