There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Cryomax Cooling System (TPE:1587) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What is Return On Capital Employed (ROCE)?
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. The formula for this calculation on Cryomax Cooling System is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.056 = NT$85m ÷ (NT$2.6b - NT$1.1b) (Based on the trailing twelve months to September 2020).
Thus, Cryomax Cooling System has an ROCE of 5.6%. In absolute terms, that's a low return but it's around the Auto Components industry average of 5.1%.
Above you can see how the current ROCE for Cryomax Cooling System compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Cryomax Cooling System's ROCE Trend?
There hasn't been much to report for Cryomax Cooling System's returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Cryomax Cooling System to be a multi-bagger going forward.
Another thing to note, Cryomax Cooling System has a high ratio of current liabilities to total assets of 42%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Key Takeaway
In summary, Cryomax Cooling System isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Although the market must be expecting these trends to improve because the stock has gained 60% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
On a final note, we found 4 warning signs for Cryomax Cooling System (1 doesn't sit too well with us) you should be aware of.
While Cryomax Cooling System isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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