What Do The Returns At Netronix (GTSM:6143) Mean Going Forward?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Netronix (GTSM:6143) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What is it?

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 Netronix is:

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

0.17 = NT$383m ÷ (NT$5.3b - NT$3.0b) (Based on the trailing twelve months to September 2020).

Thus, Netronix has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Tech industry average of 12% it's much better.

View our latest analysis for Netronix

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

How Are Returns Trending?

Netronix has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 96% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 56%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

The Bottom Line

To sum it up, Netronix is collecting higher returns from the same amount of capital, and that's impressive. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you'd like to know more about Netronix, we've spotted 3 warning signs, and 1 of them makes us a bit uncomfortable.

While Netronix 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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