If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Allis ElectricLtd (TPE:1514) and its trend of ROCE, we really liked what we saw.
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. Analysts use this formula to calculate it for Allis ElectricLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.094 = NT$332m ÷ (NT$6.3b - NT$2.8b) (Based on the trailing twelve months to September 2020).
Therefore, Allis ElectricLtd has an ROCE of 9.4%. On its own that's a low return, but compared to the average of 7.1% generated by the Electrical industry, it's much better.
View our latest analysis for Allis ElectricLtd
Historical performance is a great place to start when researching a stock so above you can see the gauge for Allis ElectricLtd's ROCE against it's prior returns. If you're interested in investigating Allis ElectricLtd's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Allis ElectricLtd Tell Us?
Allis ElectricLtd has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 154% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
Another thing to note, Allis ElectricLtd has a high ratio of current liabilities to total assets of 44%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Key Takeaway
To sum it up, Allis ElectricLtd is collecting higher returns from the same amount of capital, and that's impressive. And a remarkable 289% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
If you'd like to know more about Allis ElectricLtd, we've spotted 2 warning signs, and 1 of them is potentially serious.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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 TWSE:1514
Allis ElectricLtd
Develops, produces, and sells transformers, switching devices, and electronic products worldwide.
Flawless balance sheet with solid track record and pays a dividend.
