Our Take On The Returns On Capital At Excelsior Biopharma (GTSM:6496)

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Excelsior Biopharma (GTSM:6496), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Excelsior Biopharma is:

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

0.04 = NT$66m ÷ (NT$1.9b - NT$281m) (Based on the trailing twelve months to September 2020).

Thus, Excelsior Biopharma has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 8.5%.

View our latest analysis for Excelsior Biopharma

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 want to delve into the historical earnings, revenue and cash flow of Excelsior Biopharma, check out these free graphs here.

What Does the ROCE Trend For Excelsior Biopharma Tell Us?

In terms of Excelsior Biopharma's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.0% from 25% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

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. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 71% over the last five years. 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.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Excelsior Biopharma (of which 1 is a bit unpleasant!) that you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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