If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. And in light of that, the trends we're seeing at eGalax_eMPIA Technology's (GTSM:3556) look very promising so lets take a look.
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. To calculate this metric for eGalax_eMPIA Technology, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.25 = NT$302m ÷ (NT$1.5b - NT$333m) (Based on the trailing twelve months to September 2020).
So, eGalax_eMPIA Technology has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 10%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for eGalax_eMPIA Technology's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of eGalax_eMPIA Technology, check out these free graphs here.
The Trend Of ROCE
eGalax_eMPIA Technology's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 29% whilst employing roughly the same amount of capital. 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. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
The Bottom Line On eGalax_eMPIA Technology's ROCE
As discussed above, eGalax_eMPIA Technology appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a solid 55% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if eGalax_eMPIA Technology can keep these trends up, it could have a bright future ahead.
On a final note, we've found 1 warning sign for eGalax_eMPIA Technology that we think you should be aware of.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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