Will GMI Technology's (TPE:3312) Growth In ROCE Persist?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So when we looked at GMI Technology (TPE:3312) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the 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).

Therefore, GMI Technology has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 10% generated by the Electronic industry.

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

How Are Returns Trending?

Shareholders will be relieved that GMI Technology has broken into profitability. 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. Because in the end, a business can only get so efficient.

On a side note, GMI Technology's current liabilities are still rather high at 72% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

In summary, we're delighted to see that GMI Technology has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 122% 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.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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