Is C-Media Electronics (GTSM:6237) A Future Multi-bagger?

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at C-Media Electronics (GTSM:6237) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

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. The formula for this calculation on C-Media Electronics is:

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

0.016 = NT$24m ÷ (NT$1.7b - NT$137m) (Based on the trailing twelve months to September 2020).

Thus, C-Media Electronics has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 11%.

Check out our latest analysis for C-Media Electronics

Historical performance is a great place to start when researching a stock so above you can see the gauge for C-Media Electronics' ROCE against it's prior returns. If you're interested in investigating C-Media Electronics' past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We're delighted to see that C-Media Electronics is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 1.6%, which is always encouraging. While returns have increased, the amount of capital employed by C-Media Electronics has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

What We Can Learn From C-Media Electronics' ROCE

To bring it all together, C-Media Electronics has done well to increase the returns it's generating from its capital employed. And a remarkable 191% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if C-Media Electronics can keep these trends up, it could have a bright future ahead.

One more thing: We've identified 2 warning signs with C-Media Electronics (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.

While C-Media Electronics 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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