Should You Be Impressed By Wendell Industrial's (GTSM:6761) Returns on Capital?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at Wendell Industrial's (GTSM:6761) ROCE trend, we were pretty happy with what we saw.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Wendell Industrial is:

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

0.18 = NT$108m ÷ (NT$1.1b - NT$520m) (Based on the trailing twelve months to June 2020).

So, Wendell Industrial has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 11% it's much better.

Check out our latest analysis for Wendell Industrial

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'd like to look at how Wendell Industrial has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Wendell Industrial's ROCE Trend?

While the current returns on capital are decent, they haven't changed much. The company has employed 97% more capital in the last three years, and the returns on that capital have remained stable at 18%. 18% is a pretty standard return, and it provides some comfort knowing that Wendell Industrial has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

One more thing to note, even though ROCE has remained relatively flat over the last three years, the reduction in current liabilities to 46% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously. We'd like to see this trend continue though because as it stands today, thats still a pretty high level.

The Bottom Line

To sum it up, Wendell Industrial has simply been reinvesting capital steadily, at those decent rates of return. And the stock has followed suit returning a meaningful 12% to shareholders over the last year. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

On a separate note, we've found 2 warning signs for Wendell Industrial you'll probably want to know about.

While Wendell Industrial may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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