Should You Invest In Goldtek Technology (GTSM:6638)?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 Goldtek Technology's (GTSM:6638) 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. The formula for this calculation on Goldtek Technology is:

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

0.33 = NT$668m ÷ (NT$3.9b - NT$1.8b) (Based on the trailing twelve months to June 2020).

So, Goldtek Technology has an ROCE of 33%. In absolute terms that's a great return and it's even better than the Electronic industry average of 11%.

Check out our latest analysis for Goldtek Technology

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

How Are Returns Trending?

The trends we've noticed at Goldtek Technology are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 33%. Basically the business is earning more per dollar of capital invested and in addition to that, 1,177% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 47%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

What We Can Learn From Goldtek Technology's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Goldtek Technology has. And since the stock has fallen 25% over the last three years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing, we've spotted 2 warning signs facing Goldtek Technology that you might find interesting.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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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