Returns On Capital - An Important Metric For Grand Hall Enterprise (GTSM:8941)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Grand Hall Enterprise (GTSM:8941) and its trend of ROCE, we really liked what we saw.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Grand Hall Enterprise, this is the formula:

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

0.051 = NT$55m ÷ (NT$1.9b - NT$851m) (Based on the trailing twelve months to September 2020).

Therefore, Grand Hall Enterprise has an ROCE of 5.1%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 10%.

View our latest analysis for Grand Hall Enterprise

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

So How Is Grand Hall Enterprise's ROCE Trending?

We're delighted to see that Grand Hall Enterprise is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 5.1% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Grand Hall Enterprise is utilizing 72% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 44%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

What We Can Learn From Grand Hall Enterprise's ROCE

In summary, it's great to see that Grand Hall Enterprise has managed to break into profitability and is continuing to reinvest in its business. Astute investors may have an opportunity here because the stock has declined 12% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a separate note, we've found 2 warning signs for Grand Hall Enterprise you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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