If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Mikobeaute International (GTSM:6574), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What is it?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Mikobeaute International is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = NT$84m ÷ (NT$836m - NT$165m) (Based on the trailing twelve months to September 2020).
So, Mikobeaute International has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 6.2% generated by the Retail Distributors industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Mikobeaute International's ROCE against it's prior returns. If you'd like to look at how Mikobeaute International has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Mikobeaute International's ROCE Trending?
When we looked at the ROCE trend at Mikobeaute International, we didn't gain much confidence. To be more specific, ROCE has fallen from 37% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
The Bottom Line
From the above analysis, we find it rather worrisome that returns on capital and sales for Mikobeaute International have fallen, meanwhile the business is employing more capital than it was five years ago. Long term shareholders who've owned the stock over the last three years have experienced a 47% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
If you'd like to know more about Mikobeaute International, we've spotted 3 warning signs, and 1 of them can't be ignored.
While Mikobeaute International isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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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