How Has Plastron Precision (GTSM:6185) Allocated Its Capital?

What financial metrics can indicate to us that a company is maturing or even in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Plastron Precision (GTSM:6185), so let's see why.

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

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. Analysts use this formula to calculate it for Plastron Precision:

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

0.0064 = NT$17m ÷ (NT$2.9b - NT$203m) (Based on the trailing twelve months to September 2020).

So, Plastron Precision has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 11%.

See our latest analysis for Plastron Precision

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 Plastron Precision 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 Plastron Precision Tell Us?

There is reason to be cautious about Plastron Precision, given the returns are trending downwards. To be more specific, the ROCE was 15% 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. If these trends continue, we wouldn't expect Plastron Precision to turn into a multi-bagger.

Our Take On Plastron Precision's ROCE

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 16% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Plastron Precision does have some risks, we noticed 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

While Plastron Precision isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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