Could Cleanaway (TPE:8422) Multiply In Value?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Cleanaway (TPE:8422) looks attractive right now, so lets see what the trend of returns can tell us.

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 Cleanaway, this is the formula:

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

0.23 = NT$1.4b ÷ (NT$6.7b - NT$554m) (Based on the trailing twelve months to September 2020).

So, Cleanaway has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Commercial Services industry average of 5.0%.

View our latest analysis for Cleanaway

Historical performance is a great place to start when researching a stock so above you can see the gauge for Cleanaway's ROCE against it's prior returns. If you're interested in investigating Cleanaway's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

It's hard not to be impressed by Cleanaway's returns on capital. Over the past five years, ROCE has remained relatively flat at around 23% and the business has deployed 28% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. You'll see this when looking at well operated businesses or favorable business models.

The Bottom Line On Cleanaway's ROCE

In summary, we're delighted to see that Cleanaway has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And given the stock has only risen 26% over the last five years, we'd suspect the market is beginning to recognize these trends. So to determine if Cleanaway is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

Cleanaway does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

Cleanaway is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

If you’re looking to trade Cleanaway, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.