Can Pan Asia Chemical (GTSM:4707) Continue To Grow Its Returns On Capital?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. So on that note, Pan Asia Chemical (GTSM:4707) looks quite promising in regards to its trends of return on capital.

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 Pan Asia Chemical:

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

0.0078 = NT$43m ÷ (NT$7.6b - NT$2.2b) (Based on the trailing twelve months to September 2020).

So, Pan Asia Chemical has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 6.7%.

Check out our latest analysis for Pan Asia Chemical

Historical performance is a great place to start when researching a stock so above you can see the gauge for Pan Asia Chemical's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Pan Asia Chemical, check out these free graphs here.

What Can We Tell From Pan Asia Chemical's ROCE Trend?

Pan Asia Chemical has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 0.8% which is a sight for sore eyes. In addition to that, Pan Asia Chemical is employing 25% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

The Bottom Line On Pan Asia Chemical's ROCE

Overall, Pan Asia Chemical gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. 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.

On a separate note, we've found 1 warning sign for Pan Asia Chemical you'll probably want to know about.

While Pan Asia Chemical 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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