Our Take On The Returns On Capital At LEATEC Fine Ceramics (GTSM:6127)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating LEATEC Fine Ceramics (GTSM:6127), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on LEATEC Fine Ceramics is:

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

0.019 = NT$39m ÷ (NT$3.0b - NT$923m) (Based on the trailing twelve months to September 2020).

So, LEATEC Fine Ceramics has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 11%.

View our latest analysis for LEATEC Fine Ceramics

Historical performance is a great place to start when researching a stock so above you can see the gauge for LEATEC Fine Ceramics' ROCE against it's prior returns. If you'd like to look at how LEATEC Fine Ceramics has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is LEATEC Fine Ceramics' ROCE Trending?

On the surface, the trend of ROCE at LEATEC Fine Ceramics doesn't inspire confidence. Around five years ago the returns on capital were 5.2%, but since then they've fallen to 1.9%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From LEATEC Fine Ceramics' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that LEATEC Fine Ceramics is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 129% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

One more thing: We've identified 4 warning signs with LEATEC Fine Ceramics (at least 2 which are concerning) , and understanding these would certainly be useful.

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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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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