These Metrics Don't Make Firich Enterprises (GTSM:8076) Look Too Strong

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after we looked into Firich Enterprises (GTSM:8076), the trends above didn't look too great.

What is 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. The formula for this calculation on Firich Enterprises is:

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

0.011 = NT$40m ÷ (NT$6.1b - NT$2.6b) (Based on the trailing twelve months to September 2020).

Thus, Firich Enterprises has an ROCE of 1.1%. 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 Firich Enterprises

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

What The Trend Of ROCE Can Tell Us

The trend of returns that Firich Enterprises is generating are raising some concerns. To be more specific, today's ROCE was 4.2% five years ago but has since fallen to 1.1%. In addition to that, Firich Enterprises is now employing 23% less capital than it was five years ago. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a side note, Firich Enterprises' current liabilities are still rather high at 42% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Firich Enterprises' ROCE

In summary, it's unfortunate that Firich Enterprises is shrinking its capital base and also generating lower returns. Investors haven't taken kindly to these developments, since the stock has declined 59% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing to note, we've identified 2 warning signs with Firich Enterprises and understanding them should be part of your investment process.

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

If you decide to trade Firich Enterprises, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.