A Look Into Perfect Shape Medical's (HKG:1830) Impressive Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. That's why when we briefly looked at Perfect Shape Medical's (HKG:1830) ROCE trend, we were very happy with what we saw.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Perfect Shape Medical, this is the formula:

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

0.31 = HK$318m ÷ (HK$1.5b - HK$490m) (Based on the trailing twelve months to September 2020).

Thus, Perfect Shape Medical has an ROCE of 31%. That's a fantastic return and not only that, it outpaces the average of 7.7% earned by companies in a similar industry.

View our latest analysis for Perfect Shape Medical

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 Shape Medical, check out these free graphs here.

What Can We Tell From Perfect Shape Medical's ROCE Trend?

In terms of Perfect Shape Medical's history of ROCE, it's quite impressive. Over the past five years, ROCE has remained relatively flat at around 31% and the business has deployed 105% more capital into its operations. Now considering ROCE is an attractive 31%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Perfect Shape Medical can keep this up, we'd be very optimistic about its future.

Our Take On Perfect Shape Medical's ROCE

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. On top of that, the stock has rewarded shareholders with a remarkable 1,189% return to those who've held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

One more thing, we've spotted 3 warning signs facing Perfect Shape Medical that you might find interesting.

Perfect Shape Medical 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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