Will The ROCE Trend At Mutual-Tek Industries (GTSM:6407) Continue?

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Mutual-Tek Industries' (GTSM:6407) returns on capital, so let's have a look.

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 Mutual-Tek Industries:

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

0.067 = NT$194m ÷ (NT$4.6b - NT$1.7b) (Based on the trailing twelve months to June 2020).

Therefore, Mutual-Tek Industries has an ROCE of 6.7%. Ultimately, that's a low return and it under-performs the Electronic industry average of 11%.

See our latest analysis for Mutual-Tek Industries

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're interested in investigating Mutual-Tek Industries' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Mutual-Tek Industries Tell Us?

The fact that Mutual-Tek Industries is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 6.7% which is a sight for sore eyes. In addition to that, Mutual-Tek Industries is employing 136% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a related note, the company's ratio of current liabilities to total assets has decreased to 37%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Mutual-Tek Industries has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line

Overall, Mutual-Tek Industries gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Considering the stock has delivered 19% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

One more thing, we've spotted 6 warning signs facing Mutual-Tek Industries that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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