To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Perfect Medical Industry's (GTSM:6543) 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. The formula for this calculation on Perfect Medical Industry is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = NT$130m ÷ (NT$939m - NT$249m) (Based on the trailing twelve months to December 2020).
Therefore, Perfect Medical Industry has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Medical Equipment industry average of 10% it's much better.
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're interested in investigating Perfect Medical Industry's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Perfect Medical Industry Tell Us?
Perfect Medical Industry is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 19%. The amount of capital employed has increased too, by 94%. So we're very much inspired by what we're seeing at Perfect Medical Industry thanks to its ability to profitably reinvest capital.
Our Take On Perfect Medical Industry's ROCE
In summary, it's great to see that Perfect Medical Industry can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with a respectable 49% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Perfect Medical Industry does have some risks though, and we've spotted 2 warning signs for Perfect Medical Industry that you might be interested in.
While Perfect Medical Industry may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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