Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So on that note, Meiloon Industrial (TPE:2477) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Meiloon Industrial is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.034 = NT$170m ÷ (NT$6.7b - NT$1.6b) (Based on the trailing twelve months to September 2020).
Therefore, Meiloon Industrial has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 10%.
See our latest analysis for Meiloon Industrial
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Meiloon Industrial's past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From Meiloon Industrial's ROCE Trend?
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last five years to 3.4%. The amount of capital employed has increased too, by 23%. So we're very much inspired by what we're seeing at Meiloon Industrial thanks to its ability to profitably reinvest capital.
In Conclusion...
To sum it up, Meiloon Industrial has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 199% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.
If you'd like to know more about Meiloon Industrial, we've spotted 4 warning signs, and 2 of them are a bit concerning.
While Meiloon Industrial 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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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.
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About TWSE:2477
Excellent balance sheet and fair value.
