Are Investors Concerned With What's Going On At Laser Tek TaiwanLtd (GTSM:6207)?

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into Laser Tek TaiwanLtd (GTSM:6207), we weren't too upbeat about how things were going.

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 Laser Tek TaiwanLtd is:

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

0.048 = NT$93m ÷ (NT$3.8b - NT$1.8b) (Based on the trailing twelve months to September 2020).

Therefore, Laser Tek TaiwanLtd has an ROCE of 4.8%. Ultimately, that's a low return and it under-performs the Electronic industry average of 10%.

See our latest analysis for Laser Tek TaiwanLtd

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 want to delve into the historical earnings, revenue and cash flow of Laser Tek TaiwanLtd, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Laser Tek TaiwanLtd, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 17% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Laser Tek TaiwanLtd becoming one if things continue as they have.

On a side note, Laser Tek TaiwanLtd's current liabilities are still rather high at 49% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. However the stock has delivered a 50% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you want to know some of the risks facing Laser Tek TaiwanLtd we've found 5 warning signs (3 don't sit too well with us!) that you should be aware of before investing here.

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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