If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Net Publishing (GTSM:6542) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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. To calculate this metric for Net Publishing, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.076 = NT$59m ÷ (NT$995m - NT$219m) (Based on the trailing twelve months to September 2020).
So, Net Publishing has an ROCE of 7.6%. Ultimately, that's a low return and it under-performs the Entertainment industry average of 20%.
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're interested in investigating Net Publishing's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Net Publishing Tell Us?
In terms of Net Publishing's historical ROCE trend, it doesn't exactly demand attention. The company has employed 111% more capital in the last five years, and the returns on that capital have remained stable at 7.6%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
On a side note, Net Publishing has done well to reduce current liabilities to 22% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.
What We Can Learn From Net Publishing's ROCE
In conclusion, Net Publishing has been investing more capital into the business, but returns on that capital haven't increased. And investors may be recognizing these trends since the stock has only returned a total of 2.7% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
One more thing: We've identified 3 warning signs with Net Publishing (at least 1 which is concerning) , and understanding these would certainly be useful.
While Net Publishing 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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