If you're looking for a multi-bagger, there's a few things to 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Hold-Key Electric Wire & Cable's (TPE:1618) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Hold-Key Electric Wire & Cable, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.033 = NT$134m ÷ (NT$4.6b - NT$568m) (Based on the trailing twelve months to June 2020).
Therefore, Hold-Key Electric Wire & Cable has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Electrical industry average of 7.0%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Hold-Key Electric Wire & Cable's ROCE against it's prior returns. If you'd like to look at how Hold-Key Electric Wire & Cable has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Hold-Key Electric Wire & Cable's ROCE Trending?
Shareholders will be relieved that Hold-Key Electric Wire & Cable has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 3.3% on its capital. While returns have increased, the amount of capital employed by Hold-Key Electric Wire & Cable has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.
What We Can Learn From Hold-Key Electric Wire & Cable's ROCE
As discussed above, Hold-Key Electric Wire & Cable appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And a remarkable 101% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Hold-Key Electric Wire & Cable can keep these trends up, it could have a bright future ahead.
On a separate note, we've found 2 warning signs for Hold-Key Electric Wire & Cable you'll probably want to know about.
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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