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. 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. 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 Zippy Technology (TPE:2420) 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)
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 Zippy Technology, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = NT$522m ÷ (NT$6.2b - NT$1.8b) (Based on the trailing twelve months to September 2020).
So, Zippy Technology has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 7.3% generated by the Electrical industry.
See our latest analysis for Zippy Technology
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 Zippy Technology's past further, check out this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
Things have been pretty stable at Zippy Technology, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at Zippy Technology in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.
The Bottom Line On Zippy Technology's ROCE
In a nutshell, Zippy Technology has been trudging along with the same returns from the same amount of capital over the last five years. And with the stock having returned a mere 6.4% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
Zippy Technology does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant...
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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About TWSE:2420
Zippy Technology
Engages in the designing, manufacturing, and trading of micro switches and power supplies in Taiwan, the United States, China, Germany, Italy and internationally.
Flawless balance sheet average dividend payer.