Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Chinese Gamer International (GTSM:3083) and its trend of ROCE, we really liked what we saw.
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. Analysts use this formula to calculate it for Chinese Gamer International:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.003 = NT$4.0m ÷ (NT$1.4b – NT$134m) (Based on the trailing twelve months to June 2020).
Thus, Chinese Gamer International has an ROCE of 0.3%. In absolute terms, that’s a low return and it also under-performs the Entertainment industry average of 14%.
In the above chart we have measured Chinese Gamer International’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 report on analyst forecasts for the company.
So How Is Chinese Gamer International’s ROCE Trending?
Chinese Gamer International has broken into the black (profitability) and we’re sure it’s a sight for sore eyes. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 0.3%, which is always encouraging. While returns have increased, the amount of capital employed by Chinese Gamer International has remained flat over the period. 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.
The Key Takeaway
As discussed above, Chinese Gamer International appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 59% return over the last five years. In light of that, we think it’s worth looking further into this stock because if Chinese Gamer International can keep these trends up, it could have a bright future ahead.
Chinese Gamer International does have some risks though, and we’ve spotted 2 warning signs for Chinese Gamer International that you might be interested in.
While Chinese Gamer International isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
When trading Chinese Gamer International or any other investment, use the platform considered by many to be the Professional’s Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account.
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
These great dividend stocks are beating your savings account
Not only have these stocks been reliable dividend payers for the last 10 years but with the yield over 3% they are also easily beating your savings account (let alone the possible capital gains). Click here to see them for FREE on Simply Wall St.