Is Service & Quality Group (GTSM:3219) A Future Multi-bagger?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Service & Quality Group (GTSM:3219) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Service & Quality Group is:

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

0.057 = NT$49m ÷ (NT$871m - NT$9.5m) (Based on the trailing twelve months to December 2020).

So, Service & Quality Group has an ROCE of 5.7%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 11%.

See our latest analysis for Service & Quality Group

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 Service & Quality Group, check out these free graphs here.

What Does the ROCE Trend For Service & Quality Group Tell Us?

Service & Quality Group has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 5.7% on its capital. In addition to that, Service & Quality Group is employing 421% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

The Bottom Line

In summary, it's great to see that Service & Quality Group has managed to break into profitability and is continuing to reinvest in its business. And a remarkable 457% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a final note, we found 4 warning signs for Service & Quality Group (2 are potentially serious) you should be aware of.

While Service & Quality Group 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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