Should We Be Excited About The Trends Of Returns At Perfect Medical Industry (GTSM:6543)?

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after briefly looking over the numbers, we don't think Perfect Medical Industry (GTSM:6543) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Perfect Medical Industry, this is the formula:

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

0.089 = NT$50m ÷ (NT$679m - NT$116m) (Based on the trailing twelve months to December 2019).

Thus, Perfect Medical Industry has an ROCE of 9.0%. In absolute terms, that's a low return but it's around the Medical Equipment industry average of 10.0%.

View our latest analysis for Perfect Medical Industry

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Perfect Medical Industry, check out these free graphs here.

What Does the ROCE Trend For Perfect Medical Industry Tell Us?

There are better returns on capital out there than what we're seeing at Perfect Medical Industry. The company has employed 105% more capital in the last five years, and the returns on that capital have remained stable at 9.0%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 17% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line

In summary, Perfect Medical Industry has simply been reinvesting capital and generating the same low rate of return as before. Although the market must be expecting these trends to improve because the stock has gained 17% over the last year. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to continue researching Perfect Medical Industry, you might be interested to know about the 4 warning signs that our analysis has discovered.

While Perfect Medical Industry may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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