Will The ROCE Trend At Mechema Chemicals International (GTSM:4721) Continue?

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 Mechema Chemicals International (GTSM:4721) so let's look a bit deeper.

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 Mechema Chemicals International is:

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

0.17 = NT$196m ÷ (NT$1.7b - NT$532m) (Based on the trailing twelve months to September 2020).

Thus, Mechema Chemicals International has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 6.7% it's much better.

Check out our latest analysis for Mechema Chemicals International

Historical performance is a great place to start when researching a stock so above you can see the gauge for Mechema Chemicals International's ROCE against it's prior returns. If you're interested in investigating Mechema Chemicals International's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Mechema Chemicals International Tell Us?

Mechema Chemicals International has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 142% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Key Takeaway

In summary, we're delighted to see that Mechema Chemicals International has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 193% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to continue researching Mechema Chemicals International, you might be interested to know about the 1 warning sign that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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