If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. In light of that, when we looked at Munsin Garment (GTSM:2916) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Munsin Garment:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.068 = NT$63m ÷ (NT$1.2b - NT$288m) (Based on the trailing twelve months to September 2020).
So, Munsin Garment has an ROCE of 6.8%. In absolute terms, that's a low return but it's around the Retail Distributors industry average of 6.2%.
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 want to delve into the historical earnings, revenue and cash flow of Munsin Garment, check out these free graphs here.
So How Is Munsin Garment's ROCE Trending?
Things have been pretty stable at Munsin Garment, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Munsin Garment to be a multi-bagger going forward.
The Bottom Line
We can conclude that in regards to Munsin Garment's returns on capital employed and the trends, there isn't much change to report on. And with the stock having returned a mere 35% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Munsin Garment (of which 1 is potentially serious!) that you should know about.
While Munsin Garment 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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