The Trends At Poindus Systems (GTSM:6599) That You Should Know About

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Poindus Systems (GTSM:6599) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Poindus Systems, this is the formula:

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

0.019 = NT$9.9m ÷ (NT$642m - NT$118m) (Based on the trailing twelve months to June 2020).

So, Poindus Systems has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 11%.

Check out our latest analysis for Poindus Systems

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

What Does the ROCE Trend For Poindus Systems Tell Us?

When we looked at the ROCE trend at Poindus Systems, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.9% from 26% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Poindus Systems have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 29% over the last three years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Poindus Systems does have some risks, we noticed 4 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

While Poindus Systems 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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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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