Returns On Capital - An Important Metric For Excelsior Medical (TPE:4104)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. So when we looked at Excelsior Medical (TPE:4104) and its trend of ROCE, we really liked what we saw.

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 Medical is:

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

0.05 = NT$494m ÷ (NT$14b - NT$3.9b) (Based on the trailing twelve months to September 2020).

So, Excelsior Medical has an ROCE of 5.0%. 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 Medical

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

What Can We Tell From Excelsior Medical's ROCE Trend?

Excelsior Medical is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 44% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 29%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

What We Can Learn From Excelsior Medical's ROCE

To bring it all together, Excelsior Medical has done well to increase the returns it's generating from its capital employed. And with a respectable 43% awarded to those who held the stock over the last five years, 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.

On a final note, we've found 2 warning signs for Excelsior Medical that we think you should be aware of.

While Excelsior Medical 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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