To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. So on that note, Dacome International (GTSM:9960) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What is it?
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. Analysts use this formula to calculate it for Dacome International:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.089 = NT$50m ÷ (NT$787m - NT$229m) (Based on the trailing twelve months to September 2020).
So, Dacome International has an ROCE of 8.9%. In absolute terms, that's a low return, but it's much better than 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'd like to look at how Dacome International has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
Dacome International is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 620% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
The Bottom Line On Dacome International's ROCE
To sum it up, Dacome International is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a solid 60% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
If you'd like to know about the risks facing Dacome International, we've discovered 2 warning signs that you should be aware of.
While Dacome 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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