If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, PVA TePla (ETR:TPE) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What is it?
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 PVA TePla:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = €13m ÷ (€182m - €94m) (Based on the trailing twelve months to September 2020).
Therefore, PVA TePla has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 5.2% it's much better.
View our latest analysis for PVA TePla
In the above chart we have measured PVA TePla's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for PVA TePla.
So How Is PVA TePla's ROCE Trending?
We're delighted to see that PVA TePla is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 15% on its capital. In addition to that, PVA TePla is employing 51% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 52% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.
What We Can Learn From PVA TePla's ROCE
Long story short, we're delighted to see that PVA TePla's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 681% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if PVA TePla can keep these trends up, it could have a bright future ahead.
If you want to know some of the risks facing PVA TePla we've found 2 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.
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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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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About XTRA:TPE
PVA TePla
Develops and produces process in areas of semiconductor, metal, electrical/electronics, and optical sectors worldwide.
Excellent balance sheet and good value.
