Tehmag Foods (GTSM:1264) Looks To Prolong Its Impressive Returns

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at Tehmag Foods' (GTSM:1264) ROCE trend, we were very happy with what we saw.

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 Tehmag Foods, this is the formula:

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

0.25 = NT$804m ÷ (NT$4.0b - NT$782m) (Based on the trailing twelve months to December 2020).

Therefore, Tehmag Foods has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Food industry average of 8.9%.

Check out our latest analysis for Tehmag Foods

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 Tehmag Foods, check out these free graphs here.

So How Is Tehmag Foods' ROCE Trending?

We'd be pretty happy with returns on capital like Tehmag Foods. The company has consistently earned 25% for the last five years, and the capital employed within the business has risen 39% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

Our Take On Tehmag Foods' ROCE

In summary, we're delighted to see that Tehmag Foods has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. On top of that, the stock has rewarded shareholders with a remarkable 125% return to those who've held over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

One more thing to note, we've identified 1 warning sign with Tehmag Foods and understanding it should be part of your investment process.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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