There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Ergo, when we looked at the ROCE trends at MedianaLtd (KOSDAQ:041920), we liked what we saw.
Return On Capital Employed (ROCE): What is it?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for MedianaLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.22 = ₩15b ÷ (₩79b - ₩9.1b) (Based on the trailing twelve months to September 2020).
Thus, MedianaLtd has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Medical Equipment industry average of 13%.
Check out our latest analysis for MedianaLtd
In the above chart we have measured MedianaLtd'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.
So How Is MedianaLtd's ROCE Trending?
We'd be pretty happy with returns on capital like MedianaLtd. The company has employed 104% more capital in the last five years, and the returns on that capital have remained stable at 22%. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. You'll see this when looking at well operated businesses or favorable business models.
The Key Takeaway
In short, we'd argue MedianaLtd has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. Yet over the last five years the stock has declined 38%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.
On a final note, we've found 1 warning sign for MedianaLtd that we think you should be aware of.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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 KOSDAQ:A041920
MEDIANALtd
Develops, manufactures, and sells medical devices in South Korea.
Flawless balance sheet and good value.
