How Well Is Topview Optronics (GTSM:6556) Allocating Its Capital?

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. And from a first read, things don't look too good at Topview Optronics (GTSM:6556), 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 Topview Optronics is:

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

0.08 = NT$101m ÷ (NT$1.8b - NT$563m) (Based on the trailing twelve months to September 2020).

Therefore, Topview Optronics has an ROCE of 8.0%. Ultimately, that's a low return and it under-performs the Electronic industry average of 11%.

View our latest analysis for Topview Optronics

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

What Can We Tell From Topview Optronics' ROCE Trend?

We are a bit worried about the trend of returns on capital at Topview Optronics. Unfortunately the returns on capital have diminished from the 10% 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 Topview Optronics to turn into a multi-bagger.

The Bottom Line

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. In spite of that, the stock has delivered a 29% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you'd like to know more about Topview Optronics, we've spotted 4 warning signs, and 1 of them is a bit unpleasant.

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

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