What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at EPS Bio Technology (GTSM:4183), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on EPS Bio Technology is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = NT$45m ÷ (NT$547m - NT$111m) (Based on the trailing twelve months to December 2020).
So, EPS Bio Technology has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 12% generated by the Medical Equipment industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for EPS Bio Technology's ROCE against it's prior returns. If you're interested in investigating EPS Bio Technology's past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From EPS Bio Technology's ROCE Trend?
On the surface, the trend of ROCE at EPS Bio Technology doesn't inspire confidence. Over the last five years, returns on capital have decreased to 10% from 15% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
Our Take On EPS Bio Technology's ROCE
In summary, EPS Bio Technology is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 59% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
On a final note, we've found 2 warning signs for EPS Bio Technology that we think you should be aware of.
While EPS Bio 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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