Has Pacific Hospital Supply (GTSM:4126) Got What It Takes To Become A Multi-Bagger?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Pacific Hospital Supply (GTSM:4126) and its ROCE trend, we weren't exactly thrilled.

What is 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. The formula for this calculation on Pacific Hospital Supply is:

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

0.11 = NT$387m ÷ (NT$3.9b - NT$483m) (Based on the trailing twelve months to September 2020).

Thus, Pacific Hospital Supply has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Medical Equipment industry average of 12%.

View our latest analysis for Pacific Hospital Supply

In the above chart we have measured Pacific Hospital Supply's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Pacific Hospital Supply.

The Trend Of ROCE

On the surface, the trend of ROCE at Pacific Hospital Supply doesn't inspire confidence. To be more specific, ROCE has fallen from 18% over the last five years. However it looks like Pacific Hospital Supply might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Pacific Hospital Supply's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 22% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One more thing, we've spotted 2 warning signs facing Pacific Hospital Supply that you might find interesting.

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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