Capital Allocation Trends At Hauman Technologies (GTSM:6218) Aren't Ideal

What underlying fundamental trends can indicate that a company might be in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at Hauman Technologies (GTSM:6218), 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. The formula for this calculation on Hauman Technologies is:

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

0.044 = NT$45m ÷ (NT$1.3b - NT$320m) (Based on the trailing twelve months to December 2020).

Therefore, Hauman Technologies has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the Electronic industry average of 10%.

See our latest analysis for Hauman Technologies

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

So How Is Hauman Technologies' ROCE Trending?

We are a bit worried about the trend of returns on capital at Hauman Technologies. About five years ago, returns on capital were 8.0%, however they're now substantially lower than that as we saw above. 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 Hauman Technologies to turn into a multi-bagger.

On a side note, Hauman Technologies has done well to pay down its current liabilities to 24% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Hauman Technologies' ROCE

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. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 67% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you'd like to know more about Hauman Technologies, we've spotted 3 warning signs, and 1 of them is potentially serious.

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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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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