The Returns At De Poan Pneumatic (GTSM:1570) Provide Us With Signs Of What's To Come

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at De Poan Pneumatic (GTSM:1570) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. The formula for this calculation on De Poan Pneumatic is:

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

0.098 = NT$75m ÷ (NT$876m - NT$105m) (Based on the trailing twelve months to September 2020).

So, De Poan Pneumatic has an ROCE of 9.8%. In absolute terms, that's a low return but it's around the Machinery industry average of 9.3%.

View our latest analysis for De Poan Pneumatic

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're interested in investigating De Poan Pneumatic's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For De Poan Pneumatic Tell Us?

When we looked at the ROCE trend at De Poan Pneumatic, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.8% from 14% five years ago. However it looks like De Poan Pneumatic might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

In summary, De Poan Pneumatic is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And with the stock having returned a mere 5.9% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Like most companies, De Poan Pneumatic does come with some risks, and we've found 2 warning signs that you should be aware of.

While De Poan Pneumatic 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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