K.S. Terminals (TPE:3003) Has Some Way To Go To Become A Multi-Bagger

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. However, after briefly looking over the numbers, we don't think K.S. Terminals (TPE:3003) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

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 K.S. Terminals is:

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

0.11 = NT$564m ÷ (NT$6.6b - NT$1.4b) (Based on the trailing twelve months to September 2020).

Therefore, K.S. Terminals has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 7.1% it's much better.

Check out our latest analysis for K.S. Terminals

Above you can see how the current ROCE for K.S. Terminals compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For K.S. Terminals Tell Us?

Over the past five years, K.S. Terminals' ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if K.S. Terminals doesn't end up being a multi-bagger in a few years time. This probably explains why K.S. Terminals is paying out 42% of its income to shareholders in the form of dividends. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.

The Bottom Line

In summary, K.S. Terminals isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has gained an impressive 80% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing, we've spotted 1 warning sign facing K.S. Terminals that you might find interesting.

While K.S. Terminals may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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