When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Globetronics Technology Bhd (KLSE:GTRONIC), the trends above didn’t look too great.
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 Globetronics Technology Bhd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.089 = RM28m ÷ (RM331m – RM23m) (Based on the trailing twelve months to June 2024).
Thus, Globetronics Technology Bhd has an ROCE of 8.9%. On its own, that’s a low figure but it’s around the 8.4% average generated by the Semiconductor industry.
See our latest analysis for Globetronics Technology Bhd
roce
In the above chart we have measured Globetronics Technology Bhd’s prior ROCE against its prior performance, but the future is arguably more important. If you’re interested, you can view the analysts predictions in our free analyst report for Globetronics Technology Bhd .
In terms of Globetronics Technology Bhd’s historical ROCE movements, the trend doesn’t inspire confidence. To be more specific, the ROCE was 20% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren’t as high due potentially to new competition or smaller margins. So because these trends aren’t typically conducive to creating a multi-bagger, we wouldn’t hold our breath on Globetronics Technology Bhd becoming one if things continue as they have.
In summary, it’s unfortunate that Globetronics Technology Bhd is generating lower returns from the same amount of capital. This could explain why the stock has sunk a total of 70% in the last five years. With underlying trends that aren’t great in these areas, we’d consider looking elsewhere.
On a final note, we found 4 warning signs for Globetronics Technology Bhd (2 are a bit unpleasant) you should be aware of.
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