Will New Best Wire IndustrialLtd (GTSM:5013) Multiply In Value Going Forward?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at New Best Wire IndustrialLtd (GTSM:5013) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for New Best Wire IndustrialLtd, this is the formula:

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

0.07 = NT$384m ÷ (NT$7.1b - NT$1.6b) (Based on the trailing twelve months to September 2020).

Thus, New Best Wire IndustrialLtd has an ROCE of 7.0%. Even though it's in line with the industry average of 7.1%, it's still a low return by itself.

Check out our latest analysis for New Best Wire IndustrialLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for New Best Wire IndustrialLtd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of New Best Wire IndustrialLtd, check out these free graphs here.

So How Is New Best Wire IndustrialLtd's ROCE Trending?

In terms of New Best Wire IndustrialLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 7.0% from 11% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

The Bottom Line On New Best Wire IndustrialLtd's ROCE

Bringing it all together, while we're somewhat encouraged by New Best Wire IndustrialLtd's reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 121% gain to shareholders who have held 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.

One more thing: We've identified 2 warning signs with New Best Wire IndustrialLtd (at least 1 which is a bit concerning) , and understanding them would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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