Will CyberPower Systems (TPE:3617) Multiply In Value Going Forward?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at CyberPower Systems (TPE:3617) and its ROCE trend, we weren't exactly thrilled.

What is 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 CyberPower Systems, this is the formula:

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

0.08 = NT$501m ÷ (NT$11b - NT$4.3b) (Based on the trailing twelve months to September 2020).

So, CyberPower Systems has an ROCE of 8.0%. On its own, that's a low figure but it's around the 7.1% average generated by the Electrical industry.

See our latest analysis for CyberPower Systems

Above you can see how the current ROCE for CyberPower Systems 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.

So How Is CyberPower Systems' ROCE Trending?

When we looked at the ROCE trend at CyberPower Systems, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 8.0% from 17% five years ago. However it looks like CyberPower Systems might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

On a side note, CyberPower Systems' current liabilities are still rather high at 40% of total assets. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

To conclude, we've found that CyberPower Systems is reinvesting in the business, but returns have been falling. Unsurprisingly then, the total return to shareholders over the last five years has been flat. Therefore based on the analysis done in this article, we don't think CyberPower Systems has the makings of a multi-bagger.

CyberPower Systems does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

While CyberPower Systems 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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