There are a few key trends to look for if we want to identify the next multi-bagger. 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. However, after investigating Brinno (GTSM:7402), we don't think it's current trends fit the mold of a multi-bagger.
What is 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. The formula for this calculation on Brinno is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.061 = NT$19m ÷ (NT$398m - NT$81m) (Based on the trailing twelve months to September 2020).
Thus, Brinno has an ROCE of 6.1%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 10%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Brinno's ROCE against it's prior returns. If you're interested in investigating Brinno's past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
When we looked at the ROCE trend at Brinno, we didn't gain much confidence. To be more specific, ROCE has fallen from 21% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
Our Take On Brinno's ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for Brinno have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 45% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
One more thing: We've identified 4 warning signs with Brinno (at least 1 which makes us a bit uncomfortable) , and understanding these would certainly be useful.
While Brinno isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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