ADATA Technology (GTSM:3260) Shareholders Will Want The ROCE Trajectory To Continue

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. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, ADATA Technology (GTSM:3260) looks quite promising in regards to its trends of return on capital.

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 ADATA Technology is:

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

0.097 = NT$1.6b ÷ (NT$27b - NT$10b) (Based on the trailing twelve months to September 2020).

Therefore, ADATA Technology has an ROCE of 9.7%. On its own, that's a low figure but it's around the 11% average generated by the Semiconductor industry.

View our latest analysis for ADATA Technology

Above you can see how the current ROCE for ADATA Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

The fact that ADATA Technology is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 9.7% which is a sight for sore eyes. In addition to that, ADATA Technology is employing 41% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

What We Can Learn From ADATA Technology's ROCE

To the delight of most shareholders, ADATA Technology has now broken into profitability. And a remarkable 207% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing, we've spotted 1 warning sign facing ADATA Technology that you might find interesting.

While ADATA Technology 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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