Has OK Biotech (TPE:4155) Got What It Takes To Become A Multi-Bagger?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Having said that, from a first glance at OK Biotech (TPE:4155) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for OK Biotech:

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

0.061 = NT$121m ÷ (NT$2.6b - NT$581m) (Based on the trailing twelve months to September 2020).

Thus, OK Biotech has an ROCE of 6.1%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 12%.

View our latest analysis for OK Biotech

In the above chart we have measured OK Biotech's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for OK Biotech.

The Trend Of ROCE

Unfortunately, the trend isn't great with ROCE falling from 7.6% five years ago, while capital employed has grown 66%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. OK Biotech probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt. Also, we found that by looking at the company's latest EBIT, the figure is within 10% of the previous year's EBIT so you can basically assign the ROCE drop primarily to that capital raise.

What We Can Learn From OK Biotech's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that OK Biotech is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 25% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

On a separate note, we've found 3 warning signs for OK Biotech you'll probably want to know about.

While OK Biotech 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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