Tonlin Department StoreLtd (TWSE:2910) Has Some Way To Go To Become A Multi-Bagger

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 Tonlin Department StoreLtd (TWSE:2910) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Tonlin Department StoreLtd is:

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

0.041 = NT$213m ÷ (NT$5.9b - NT$671m) (Based on the trailing twelve months to September 2024).

So, Tonlin Department StoreLtd has an ROCE of 4.1%. Even though it's in line with the industry average of 4.3%, it's still a low return by itself.

Check out our latest analysis for Tonlin Department StoreLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tonlin Department StoreLtd's ROCE against it's prior returns. If you'd like to look at how Tonlin Department StoreLtd has performed in the past in other metrics, you can view this free graph of Tonlin Department StoreLtd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Tonlin Department StoreLtd's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 4.1% for the last five years, and the capital employed within the business has risen 53% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a side note, Tonlin Department StoreLtd has done well to reduce current liabilities to 11% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line

In conclusion, Tonlin Department StoreLtd has been investing more capital into the business, but returns on that capital haven't increased. And investors appear hesitant that the trends will pick up because the stock has fallen 23% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing: We've identified 2 warning signs with Tonlin Department StoreLtd (at least 1 which shouldn't be ignored) , and understanding these would certainly be useful.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.