The Trends At Prime Oil Chemical Service (TPE:2904) That You Should Know About

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. With that in mind, the ROCE of Prime Oil Chemical Service (TPE:2904) looks decent, right now, so lets see what the trend of returns can tell us.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Prime Oil Chemical Service:

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

0.13 = NT$170m ÷ (NT$1.6b - NT$335m) (Based on the trailing twelve months to September 2020).

Thus, Prime Oil Chemical Service has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Oil and Gas industry average of 7.7% it's much better.

See our latest analysis for Prime Oil Chemical Service

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 want to delve into the historical earnings, revenue and cash flow of Prime Oil Chemical Service, check out these free graphs here.

What Can We Tell From Prime Oil Chemical Service's ROCE Trend?

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 13% and the business has deployed 32% more capital into its operations. Since 13% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 21% of total assets, this reported ROCE would probably be less than13% because total capital employed would be higher.The 13% ROCE could be even lower if current liabilities weren't 21% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.

In Conclusion...

To sum it up, Prime Oil Chemical Service has simply been reinvesting capital steadily, at those decent rates of return. And given the stock has only risen 40% over the last five years, we'd suspect the market is beginning to recognize these trends. So to determine if Prime Oil Chemical Service is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

Prime Oil Chemical Service does have some risks though, and we've spotted 2 warning signs for Prime Oil Chemical Service that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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