Returns Are Gaining Momentum At Browave (GTSM:3163)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So when we looked at Browave (GTSM:3163) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Browave:

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

0.18 = NT$405m ÷ (NT$3.0b - NT$778m) (Based on the trailing twelve months to December 2020).

So, Browave has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Communications industry average of 7.9% it's much better.

Check out our latest analysis for Browave

Historical performance is a great place to start when researching a stock so above you can see the gauge for Browave's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Browave, check out these free graphs here.

The Trend Of ROCE

We're delighted to see that Browave is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 18% on its capital. In addition to that, Browave is employing 50% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In Conclusion...

To the delight of most shareholders, Browave has now broken into profitability. Since the stock has only returned 35% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

One more thing, we've spotted 2 warning signs facing Browave that you might find interesting.

While Browave isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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