Returns On Capital Tell Us A Lot About Kintech Electronics (GTSM:6210)

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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 Kintech Electronics (GTSM:6210), so let's see why.

What is Return On Capital Employed (ROCE)?

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. To calculate this metric for Kintech Electronics, this is the formula:

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

0.18 = NT$161m ÷ (NT$1.1b - NT$161m) (Based on the trailing twelve months to September 2020).

Therefore, Kintech Electronics has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 10% it's much better.

See our latest analysis for Kintech Electronics

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kintech Electronics' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Kintech Electronics, check out these free graphs here.

So How Is Kintech Electronics' ROCE Trending?

There is reason to be cautious about Kintech Electronics, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 31% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Kintech Electronics to turn into a multi-bagger.

What We Can Learn From Kintech Electronics' ROCE

In summary, it's unfortunate that Kintech Electronics is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 26% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

On a final note, we found 3 warning signs for Kintech Electronics (1 is a bit concerning) you should be aware of.

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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