If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So on that note, Y-Entec (KOSDAQ:067900) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Y-Entec:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = ₩32b ÷ (₩260b - ₩65b) (Based on the trailing twelve months to December 2020).
Thus, Y-Entec has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 10% generated by the Commercial Services industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Y-Entec's ROCE against it's prior returns. If you'd like to look at how Y-Entec has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
The trends we've noticed at Y-Entec are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 16%. 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 107%. So we're very much inspired by what we're seeing at Y-Entec thanks to its ability to profitably reinvest capital.
The Bottom Line
To sum it up, Y-Entec has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Y-Entec can keep these trends up, it could have a bright future ahead.
One more thing, we've spotted 1 warning sign facing Y-Entec that you might find interesting.
While Y-Entec 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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