PVA TePla (ETR:TPE) Could Become A Multi-Bagger

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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 the ROCE trend of PVA TePla (ETR:TPE) we really liked what we saw.

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)

0.21 = €21m ÷ (€189m - €86m) (Based on the trailing twelve months to September 2021).

So, PVA TePla has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 11%.

See 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

We like the trends that we're seeing from PVA TePla. Over the last five years, returns on capital employed have risen substantially to 21%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 73%. So we're very much inspired by what we're seeing at PVA TePla thanks to its ability to profitably reinvest capital.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 46% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

What We Can Learn From PVA TePla's ROCE

All in all, it's terrific to see that PVA TePla is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 1,070% 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.

PVA TePla does have some risks though, and we've spotted 1 warning sign for PVA TePla that you might be interested in.

PVA TePla is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.