Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. That's why when we briefly looked at Li Kang Biomedical's (GTSM:6242) ROCE trend, we were pretty happy with what we saw.
Understanding Return On Capital Employed (ROCE)
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 Li Kang Biomedical is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = NT$81m ÷ (NT$645m - NT$93m) (Based on the trailing twelve months to December 2020).
Thus, Li Kang Biomedical has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 12% generated by the Personal Products industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Li Kang Biomedical's ROCE against it's prior returns. If you'd like to look at how Li Kang Biomedical has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Li Kang Biomedical's ROCE Trending?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 36% more capital in the last five years, and the returns on that capital have remained stable at 15%. 15% is a pretty standard return, and it provides some comfort knowing that Li Kang Biomedical has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
To sum it up, Li Kang Biomedical has simply been reinvesting capital steadily, at those decent rates of return. In light of this, the stock has only gained 28% over the last five years for shareholders who have owned the stock in this period. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.
If you want to know some of the risks facing Li Kang Biomedical we've found 3 warning signs (1 is concerning!) that you should be aware of before investing here.
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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