To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Jetwell Computer (GTSM:3147) looks decent, right now, so lets see what the trend of returns can tell us.
What is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Jetwell Computer, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = NT$143m ÷ (NT$2.1b - NT$1.3b) (Based on the trailing twelve months to December 2020).
Therefore, Jetwell Computer has an ROCE of 20%. That's a relatively normal return on capital, and it's around the 17% generated by the IT industry.
See our latest analysis for Jetwell Computer
Historical performance is a great place to start when researching a stock so above you can see the gauge for Jetwell Computer's ROCE against it's prior returns. If you'd like to look at how Jetwell Computer has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Jetwell Computer Tell Us?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 20% for the last five years, and the capital employed within the business has risen 58% in that time. 20% is a pretty standard return, and it provides some comfort knowing that Jetwell Computer has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 64% of total assets, this reported ROCE would probably be less than20% because total capital employed would be higher.The 20% ROCE could be even lower if current liabilities weren't 64% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.
The Bottom Line On Jetwell Computer's ROCE
In the end, Jetwell Computer has proven its ability to adequately reinvest capital at good rates of return. And long term investors would be thrilled with the 192% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
On a final note, we found 5 warning signs for Jetwell Computer (2 can't be ignored) you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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 TPEX:3147
Jetwell Computer
Provides IT infrastructure and integration services in Taiwan.
Outstanding track record with excellent balance sheet.
