Can Success Prime (TPE:2496) Continue To Grow Its Returns On Capital?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Success Prime (TPE:2496) looks quite promising in regards to its trends of return on capital.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Success Prime, this is the formula:

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

0.085 = NT$75m ÷ (NT$1.2b - NT$323m) (Based on the trailing twelve months to September 2020).

Thus, Success Prime has an ROCE of 8.5%. In absolute terms, that's a low return but it's around the Consumer Services industry average of 10%.

Check out our latest analysis for Success Prime

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 Success Prime's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Success Prime Tell Us?

The fact that Success Prime is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 8.5% on its capital. Not only that, but the company is utilizing 1,291% more capital than before, but that's to be expected from a company trying to break into profitability. 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 27%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Success Prime has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From Success Prime's ROCE

Long story short, we're delighted to see that Success Prime's reinvestment activities have paid off and the company is now profitable. And since the stock has fallen 16% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing to note, we've identified 2 warning signs with Success Prime and understanding these should be part of your investment process.

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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