What XAC Automation's (GTSM:5490) Returns On Capital Can Tell Us

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. On that note, looking into XAC Automation (GTSM:5490), we weren't too upbeat about how things were going.

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 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%. In absolute terms that's a great return and it's even better than the Electronic industry average of 10%.

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'd like to look at how XAC Automation has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For XAC Automation Tell Us?

In terms of XAC Automation's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 35%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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. If these trends continue, we wouldn't expect XAC Automation to turn into a multi-bagger.

The Bottom Line

In summary, it's unfortunate that XAC Automation is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 60% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing: We've identified 3 warning signs with XAC Automation (at least 1 which can't be ignored) , and understanding them would certainly be useful.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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