Here's What Yuan High-Tech Development's (GTSM:5474) Strong Returns On Capital Means

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So, when we ran our eye over Yuan High-Tech Development's (GTSM:5474) trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Yuan High-Tech Development, this is the formula:

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

0.48 = NT$660m ÷ (NT$2.3b - NT$862m) (Based on the trailing twelve months to September 2020).

Thus, Yuan High-Tech Development has an ROCE of 48%. That's a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.

See our latest analysis for Yuan High-Tech Development

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're interested in investigating Yuan High-Tech Development's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Yuan High-Tech Development Tell Us?

It's hard not to be impressed by Yuan High-Tech Development's returns on capital. The company has consistently earned 48% for the last five years, and the capital employed within the business has risen 113% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Yuan High-Tech Development can keep this up, we'd be very optimistic about its future.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 38% of total assets, this reported ROCE would probably be less than48% because total capital employed would be higher.The 48% ROCE could be even lower if current liabilities weren't 38% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.

Our Take On Yuan High-Tech Development's ROCE

Yuan High-Tech Development has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And long term investors would be thrilled with the 314% return they've received over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

If you want to continue researching Yuan High-Tech Development, you might be interested to know about the 2 warning signs that our analysis has discovered.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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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