Some Investors May Be Worried About LEATEC Fine Ceramics' (GTSM:6127) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think LEATEC Fine Ceramics (GTSM:6127) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for LEATEC Fine Ceramics:

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

0.013 = NT$29m ÷ (NT$3.2b - NT$883m) (Based on the trailing twelve months to December 2020).

Thus, LEATEC Fine Ceramics has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 10%.

Check out our latest analysis for LEATEC Fine Ceramics

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 LEATEC Fine Ceramics 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 LEATEC Fine Ceramics Tell Us?

On the surface, the trend of ROCE at LEATEC Fine Ceramics doesn't inspire confidence. Over the last five years, returns on capital have decreased to 1.3% from 5.6% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for LEATEC Fine Ceramics. And long term investors must be optimistic going forward because the stock has returned a huge 175% to shareholders in the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

LEATEC Fine Ceramics does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

While LEATEC Fine Ceramics may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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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