There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Shin Foong Specialty and Applied Materials (TPE:6582) looks attractive right now, so lets see what the trend of returns can tell us.
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 Shin Foong Specialty and Applied Materials:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.32 = NT$1.3b ÷ (NT$4.8b - NT$776m) (Based on the trailing twelve months to September 2020).
Therefore, Shin Foong Specialty and Applied Materials has an ROCE of 32%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 6.7%.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Shin Foong Specialty and Applied Materials 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 Shin Foong Specialty and Applied Materials Tell Us?
We'd be pretty happy with returns on capital like Shin Foong Specialty and Applied Materials. Over the past five years, ROCE has remained relatively flat at around 32% and the business has deployed 87% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Shin Foong Specialty and Applied Materials can keep this up, we'd be very optimistic about its future.
What We Can Learn From Shin Foong Specialty and Applied Materials' ROCE
In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. On top of that, the stock has rewarded shareholders with a remarkable 212% return to those who've held over the last three years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
One more thing: We've identified 3 warning signs with Shin Foong Specialty and Applied Materials (at least 1 which doesn't sit too well with us) , and understanding them would certainly be useful.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
When trading Shin Foong Specialty and Applied Materials or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted
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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.