What Can The Trends At GMI Technology (TPE:3312) Tell Us About Their Returns?

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at GMI Technology (TPE:3312) and its trend of ROCE, we really liked 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. Analysts use this formula to calculate it for GMI Technology:

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

0.15 = NT$215m ÷ (NT$5.1b - NT$3.6b) (Based on the trailing twelve months to September 2020).

So, GMI Technology has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 11% generated by the Electronic industry.

Check out our latest analysis for GMI Technology

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

What Can We Tell From GMI Technology's ROCE Trend?

GMI Technology has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 15% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

On a separate but related note, it's important to know that GMI Technology has a current liabilities to total assets ratio of 72%, which we'd consider pretty high. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

To bring it all together, GMI Technology has done well to increase the returns it's generating from its capital employed. And a remarkable 189% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if GMI Technology can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 3 warning signs with GMI Technology and understanding these should be part of your investment process.

While GMI Technology 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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