If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in BenQ Medical Technology's (GTSM:4116) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for BenQ Medical Technology, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.073 = NT$97m ÷ (NT$1.8b - NT$468m) (Based on the trailing twelve months to December 2020).
So, BenQ Medical Technology has an ROCE of 7.3%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 10%.
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 BenQ Medical Technology, check out these free graphs here.
So How Is BenQ Medical Technology's ROCE Trending?
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 7.3%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 26%. So we're very much inspired by what we're seeing at BenQ Medical Technology thanks to its ability to profitably reinvest capital.
The Key Takeaway
All in all, it's terrific to see that BenQ Medical Technology is reaping the rewards from prior investments and is growing its capital base. Given the stock has declined 30% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
One more thing to note, we've identified 2 warning signs with BenQ Medical Technology and understanding them should be part of your investment process.
While BenQ Medical Technology 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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