Be Wary Of Axcen Photonics (GTSM:6530) And Its Returns On Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. In light of that, from a first glance at Axcen Photonics (GTSM:6530), we've spotted some signs that it could be struggling, so let's investigate.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Axcen Photonics:

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

0.078 = NT$35m ÷ (NT$490m - NT$47m) (Based on the trailing twelve months to September 2020).

Therefore, Axcen Photonics has an ROCE of 7.8%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 9.8%.

Check out our latest analysis for Axcen Photonics

Historical performance is a great place to start when researching a stock so above you can see the gauge for Axcen Photonics' ROCE against it's prior returns. If you're interested in investigating Axcen Photonics' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Axcen Photonics' ROCE Trending?

In terms of Axcen Photonics' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 11%, 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. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Axcen Photonics becoming one if things continue as they have.

The Bottom Line On Axcen Photonics' ROCE

In summary, it's unfortunate that Axcen Photonics is generating lower returns from the same amount of capital. However the stock has delivered a 68% 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 Axcen Photonics we've found 3 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

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

If you’re looking to trade Axcen Photonics, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.