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. 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. Speaking of which, we noticed some great changes in Provision InformationLTD's (GTSM:6590) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What is it?
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 Provision InformationLTD, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = NT$92m ÷ (NT$622m - NT$144m) (Based on the trailing twelve months to September 2020).
Therefore, Provision InformationLTD has an ROCE of 19%. That's a pretty standard return and it's in line with the industry average of 19%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Provision InformationLTD's ROCE against it's prior returns. If you'd like to look at how Provision InformationLTD has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
Provision InformationLTD is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 19%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 174%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
The Bottom Line On Provision InformationLTD's ROCE
All in all, it's terrific to see that Provision InformationLTD is reaping the rewards from prior investments and is growing its capital base. And a remarkable 144% total return over the last three years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
If you want to continue researching Provision InformationLTD, you might be interested to know about the 2 warning signs that our analysis has discovered.
While Provision InformationLTD may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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