Returns On Capital - An Important Metric For Nam Liong Global (GTSM:5450)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 Nam Liong Global (GTSM:5450) and its trend of ROCE, we really liked what we saw.

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 Nam Liong Global, this is the formula:

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

0.058 = NT$113m ÷ (NT$3.0b - NT$1.0b) (Based on the trailing twelve months to September 2020).

Therefore, Nam Liong Global has an ROCE of 5.8%. Ultimately, that's a low return and it under-performs the Tech industry average of 12%.

View our latest analysis for Nam Liong Global

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 Nam Liong Global has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Nam Liong Global 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 5.8% on its capital. And unsurprisingly, like most companies trying to break into the black, Nam Liong Global is utilizing 219% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

What We Can Learn From Nam Liong Global's ROCE

Long story short, we're delighted to see that Nam Liong Global's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a solid 85% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Nam Liong Global can keep these trends up, it could have a bright future ahead.

On a final note, we found 4 warning signs for Nam Liong Global (1 is significant) you should be aware of.

While Nam Liong Global 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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