Be Wary Of XAC Automation (GTSM:5490) And Its Returns On Capital

What financial metrics can indicate to us that a company is maturing or even in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within XAC Automation (GTSM:5490), we weren't too hopeful.

Understanding Return On Capital Employed (ROCE)

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 XAC Automation, this is the formula:

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

0.23 = NT$395m ÷ (NT$2.1b - NT$378m) (Based on the trailing twelve months to September 2020).

Therefore, XAC Automation has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 10% earned by companies in a similar industry.

Check out our latest analysis for XAC Automation

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

The Trend Of ROCE

In terms of XAC Automation's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 35% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on XAC Automation becoming one if things continue as they have.

The Bottom Line

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 56% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

XAC Automation does have some risks, we noticed 3 warning signs (and 1 which is concerning) we think you should know about.

XAC Automation is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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