Can Value Valves (GTSM:4580) Keep Up These Impressive Returns?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Ergo, when we looked at the ROCE trends at Value Valves (GTSM:4580), we liked what we saw.

What is 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. The formula for this calculation on Value Valves is:

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

0.25 = NT$469m ÷ (NT$2.6b - NT$770m) (Based on the trailing twelve months to September 2020).

Therefore, Value Valves has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Machinery industry average of 9.3%.

See our latest analysis for Value Valves

In the above chart we have measured Value Valves' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Value Valves here for free.

So How Is Value Valves' ROCE Trending?

It's hard not to be impressed by Value Valves' returns on capital. The company has consistently earned 25% for the last four years, and the capital employed within the business has risen 178% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

One more thing to note, even though ROCE has remained relatively flat over the last four years, the reduction in current liabilities to 29% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

In Conclusion...

In summary, we're delighted to see that Value Valves has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. However, despite the favorable fundamentals, the stock has fallen 11% over the last year, so there might be an opportunity here for astute investors. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

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

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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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