Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Pou Chen (TWSE:9904), we don't think it's current trends fit the mold of a multi-bagger.
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. The formula for this calculation on Pou Chen is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.051 = NT$13b ÷ (NT$347b - NT$82b) (Based on the trailing twelve months to June 2024).
Thus, Pou Chen has an ROCE of 5.1%. In absolute terms, that's a low return, but it's much better than the Luxury industry average of 2.1%.
Check out our latest analysis for Pou Chen
In the above chart we have measured Pou Chen's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Pou Chen .
What The Trend Of ROCE Can Tell Us
Things have been pretty stable at Pou Chen, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Pou Chen to be a multi-bagger going forward.
The Bottom Line
In summary, Pou Chen isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Unsurprisingly, the stock has only gained 7.1% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
Pou Chen does have some risks though, and we've spotted 1 warning sign for Pou Chen that you might be interested in.
While Pou Chen 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
About TWSE:9904
Pou Chen
Designs, manufactures, and sells various shoes in Taiwan and internationally.
Solid track record with excellent balance sheet.
