Here’s What’s Happening With Returns At Pegavision (TPE:6491)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. With that in mind, we've noticed some promising trends at Pegavision (TPE:6491) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

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 Pegavision is:

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

0.18 = NT$856m ÷ (NT$6.4b - NT$1.7b) (Based on the trailing twelve months to December 2020).

So, Pegavision has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Medical Equipment industry average of 12% it's much better.

See our latest analysis for Pegavision

In the above chart we have measured Pegavision'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 Pegavision.

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from Pegavision. Over the last five years, returns on capital employed have risen substantially to 18%. Basically the business is earning more per dollar of capital invested and in addition to that, 285% more capital is being employed now too. So we're very much inspired by what we're seeing at Pegavision thanks to its ability to profitably reinvest capital.

What We Can Learn From Pegavision's ROCE

In summary, it's great to see that Pegavision 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 the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you'd like to know about the risks facing Pegavision, we've discovered 1 warning sign that you should be aware of.

While Pegavision 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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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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