What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. In light of that, when we looked at Excelsior Biopharma (GTSM:6496) and its ROCE trend, we weren't exactly thrilled.
What is 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. To calculate this metric for Excelsior Biopharma, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.025 = NT$41m ÷ (NT$1.9b - NT$249m) (Based on the trailing twelve months to December 2020).
So, Excelsior Biopharma has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 8.9%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Excelsior Biopharma's ROCE against it's prior returns. If you'd like to look at how Excelsior Biopharma has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
When we looked at the ROCE trend at Excelsior Biopharma, we didn't gain much confidence. To be more specific, ROCE has fallen from 21% over the last five years. However it looks like Excelsior Biopharma 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.
Bringing it all together, while we're somewhat encouraged by Excelsior Biopharma's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 47% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
One more thing: We've identified 4 warning signs with Excelsior Biopharma (at least 1 which is a bit unpleasant) , and understanding these would certainly be useful.
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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