Returns On Capital Are Showing Encouraging Signs At Goldsun Building Materials (TWSE:2504)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Goldsun Building Materials' (TWSE:2504) returns on capital, so let's have a look.

Understanding 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. The formula for this calculation on Goldsun Building Materials is:

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

0.13 = NT$4.0b ÷ (NT$41b - NT$8.7b) (Based on the trailing twelve months to December 2023).

Thus, Goldsun Building Materials has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 7.4% generated by the Basic Materials industry.

See our latest analysis for Goldsun Building Materials

In the above chart we have measured Goldsun Building Materials' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Goldsun Building Materials for free.

What Does the ROCE Trend For Goldsun Building Materials Tell Us?

Investors would be pleased with what's happening at Goldsun Building Materials. Over the last five years, returns on capital employed have risen substantially to 13%. The amount of capital employed has increased too, by 29%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

In Conclusion...

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Goldsun Building Materials has. And a remarkable 531% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Goldsun Building Materials can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 1 warning sign with Goldsun Building Materials and understanding this should be part of your investment process.

While Goldsun Building Materials may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.