Does Pancolour Ink (GTSM:4765) Have The Makings Of A Multi-Bagger?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. With that in mind, we've noticed some promising trends at Pancolour Ink (GTSM:4765) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Pancolour Ink, this is the formula:

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

0.16 = NT$130m ÷ (NT$1.0b - NT$237m) (Based on the trailing twelve months to June 2020).

Thus, Pancolour Ink has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 6.7% it's much better.

View our latest analysis for Pancolour Ink

Historical performance is a great place to start when researching a stock so above you can see the gauge for Pancolour Ink's ROCE against it's prior returns. If you'd like to look at how Pancolour Ink has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Pancolour Ink Tell Us?

Pancolour Ink is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 16%. Basically the business is earning more per dollar of capital invested and in addition to that, 43% more capital is being employed now too. So we're very much inspired by what we're seeing at Pancolour Ink thanks to its ability to profitably reinvest capital.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 23% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

What We Can Learn From Pancolour Ink's ROCE

All in all, it's terrific to see that Pancolour Ink is reaping the rewards from prior investments and is growing its capital base. Given the stock has declined 31% in the last three years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a final note, we've found 4 warning signs for Pancolour Ink that we think you should be aware of.

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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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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