What We Make Of ABICO NetComLtd's (GTSM:8071) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in ABICO NetComLtd's (GTSM:8071) returns on capital, so let's have a look.

Understanding 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 ABICO NetComLtd is:

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

0.089 = NT$141m ÷ (NT$3.7b - NT$2.1b) (Based on the trailing twelve months to September 2020).

Thus, ABICO NetComLtd has an ROCE of 8.9%. In absolute terms, that's a low return and it also under-performs the Tech industry average of 12%.

See our latest analysis for ABICO NetComLtd

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

What Does the ROCE Trend For ABICO NetComLtd Tell Us?

We're delighted to see that ABICO NetComLtd is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 8.9% on its capital. And unsurprisingly, like most companies trying to break into the black, ABICO NetComLtd is utilizing 43% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 57% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

The Bottom Line On ABICO NetComLtd's ROCE

To the delight of most shareholders, ABICO NetComLtd has now broken into profitability. Considering the stock has delivered 8.0% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

One more thing: We've identified 3 warning signs with ABICO NetComLtd (at least 1 which makes us a bit uncomfortable) , and understanding these would certainly be useful.

While ABICO NetComLtd 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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