Here's What AMPACS' (GTSM:6743) Strong Returns On Capital Means

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. 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 AMPACS (GTSM:6743) looks attractive right now, so lets see what the trend of returns can tell us.

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. Analysts use this formula to calculate it for AMPACS:

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

0.25 = NT$557m ÷ (NT$5.8b - NT$3.6b) (Based on the trailing twelve months to September 2020).

Thus, AMPACS has an ROCE of 25%. That's a fantastic return and not only that, it outpaces the average of 10.0% earned by companies in a similar industry.

Check out our latest analysis for AMPACS

Above you can see how the current ROCE for AMPACS 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.

How Are Returns Trending?

AMPACS deserves to be commended in regards to it's returns. The company has employed 55% more capital in the last three years, and the returns on that capital have remained stable at 25%. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

Another point to note, we noticed the company has increased current liabilities over the last three years. This is intriguing because if current liabilities hadn't increased to 62% of total assets, this reported ROCE would probably be less than25% because total capital employed would be higher.The 25% ROCE could be even lower if current liabilities weren't 62% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.

The Key Takeaway

AMPACS has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And the stock has done incredibly well with a 347% return over the last year, so long term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

AMPACS does have some risks though, and we've spotted 2 warning signs for AMPACS that you might be interested in.

AMPACS 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.

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