What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, ARBOR Technology (GTSM:3594) looks quite promising in regards to its trends of return on capital.
What is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for ARBOR Technology, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.021 = NT$44m ÷ (NT$3.1b - NT$976m) (Based on the trailing twelve months to September 2020).
So, ARBOR Technology has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Tech industry average of 12%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for ARBOR Technology's ROCE against it's prior returns. If you're interested in investigating ARBOR Technology's past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 2.1%. The amount of capital employed has increased too, by 47%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
The Key Takeaway
In summary, it's great to see that ARBOR Technology can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
ARBOR Technology does have some risks, we noticed 6 warning signs (and 2 which make us uncomfortable) we think you should know about.
While ARBOR 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.
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