Keystone Microtech (GTSM:6683) Knows How to Allocate Capital

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Keystone Microtech (GTSM:6683) looks attractive right now, so lets see what the trend of returns can tell us.

What is 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. To calculate this metric for Keystone Microtech, this is the formula:

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

0.26 = NT$392m ÷ (NT$2.0b - NT$464m) (Based on the trailing twelve months to September 2020).

Therefore, Keystone Microtech has an ROCE of 26%. That's a fantastic return and not only that, it outpaces the average of 10% earned by companies in a similar industry.

Check out our latest analysis for Keystone Microtech

In the above chart we have measured Keystone Microtech's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Keystone Microtech's ROCE Trending?

Keystone Microtech deserves to be commended in regards to it's returns. The company has consistently earned 26% for the last four years, and the capital employed within the business has risen 110% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Keystone Microtech can keep this up, we'd be very optimistic about its future.

The Bottom Line On Keystone Microtech's ROCE

In summary, we're delighted to see that Keystone Microtech has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. Therefore it's no surprise that shareholders have earned a respectable 62% return if they held over the last year. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

Like most companies, Keystone Microtech does come with some risks, and we've found 1 warning sign that you should be aware of.

Keystone Microtech is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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This article by Simply Wall St is general in nature. 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.
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