Could Nan Liu Enterprise (TPE:6504) Multiply In Value?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Ergo, when we looked at the ROCE trends at Nan Liu Enterprise (TPE:6504), we liked what we saw.

Understanding Return On Capital Employed (ROCE)

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 Nan Liu Enterprise, this is the formula:

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

0.24 = NT$1.7b ÷ (NT$11b - NT$3.6b) (Based on the trailing twelve months to September 2020).

So, Nan Liu Enterprise has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 4.0% earned by companies in a similar industry.

Check out our latest analysis for Nan Liu Enterprise

Above you can see how the current ROCE for Nan Liu Enterprise compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Nan Liu Enterprise here for free.

What The Trend Of ROCE Can Tell Us

In terms of Nan Liu Enterprise's history of ROCE, it's quite impressive. The company has employed 109% more capital in the last five years, and the returns on that capital have remained stable at 24%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

The Bottom Line

In summary, we're delighted to see that Nan Liu Enterprise 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 14% over the last five years, we'd suspect the market is beginning to recognize these trends. So to determine if Nan Liu Enterprise is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

Nan Liu Enterprise does have some risks though, and we've spotted 3 warning signs for Nan Liu Enterprise that you might be interested in.

Nan Liu Enterprise 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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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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