Is Subtron Technology (GTSM:8179) Likely To Turn Things Around?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. In light of that, when we looked at Subtron Technology (GTSM:8179) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Subtron Technology, this is the formula:

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

0.0053 = NT$30m ÷ (NT$6.8b - NT$1.1b) (Based on the trailing twelve months to June 2020).

Thus, Subtron Technology has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 11%.

View our latest analysis for Subtron Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Subtron Technology's ROCE against it's prior returns. If you're interested in investigating Subtron Technology's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Subtron Technology Tell Us?

On the surface, the trend of ROCE at Subtron Technology doesn't inspire confidence. Over the last five years, returns on capital have decreased to 0.5% from 1.8% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Subtron Technology's reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 136% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Subtron Technology does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those don't sit too well with us...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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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