There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at eCloudvalley Digital Technology (GTSM:6689) and its trend of ROCE, we really liked what we saw.
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. The formula for this calculation on eCloudvalley Digital Technology is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.092 = NT$154m ÷ (NT$3.5b - NT$1.8b) (Based on the trailing twelve months to December 2020).
Thus, eCloudvalley Digital Technology has an ROCE of 9.2%. Ultimately, that's a low return and it under-performs the IT industry average of 17%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for eCloudvalley Digital Technology's ROCE against it's prior returns. If you'd like to look at how eCloudvalley Digital Technology has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
eCloudvalley Digital Technology has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 9.2% on its capital. In addition to that, eCloudvalley Digital Technology is employing 19,491% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
One more thing to note, eCloudvalley Digital Technology has decreased current liabilities to 52% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.
What We Can Learn From eCloudvalley Digital Technology's ROCE
Long story short, we're delighted to see that eCloudvalley Digital Technology's reinvestment activities have paid off and the company is now profitable. And a remarkable 156% total return over the last year tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.
eCloudvalley Digital Technology does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is significant...
While eCloudvalley Digital Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
If you’re looking to trade eCloudvalley Digital Technology, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted
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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.