If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ergo, when we looked at the ROCE trends at GEM Services (TPE:6525), we liked what we saw.
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 GEM Services is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.24 = NT$884m ÷ (NT$4.8b - NT$1.1b) (Based on the trailing twelve months to September 2020).
Thus, GEM Services has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 11% earned by companies in a similar industry.
View our latest analysis for GEM Services
Historical performance is a great place to start when researching a stock so above you can see the gauge for GEM Services' ROCE against it's prior returns. If you're interested in investigating GEM Services' past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For GEM Services Tell Us?
It's hard not to be impressed by GEM Services' returns on capital. Over the past five years, ROCE has remained relatively flat at around 24% and the business has deployed 77% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. You'll see this when looking at well operated businesses or favorable business models.
The Key Takeaway
In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. And the stock has followed suit returning a meaningful 33% to shareholders over the last three years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
GEM Services does have some risks though, and we've spotted 1 warning sign for GEM Services that you might be interested in.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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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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About TWSE:6525
Flawless balance sheet, good value and pays a dividend.
