Has TSC Auto ID Technology (GTSM:3611) Got What It Takes To Become A Multi-Bagger?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at TSC Auto ID Technology (GTSM:3611) and its ROCE trend, we weren't exactly thrilled.

Understanding 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 TSC Auto ID Technology, this is the formula:

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

0.18 = NT$898m ÷ (NT$6.7b - NT$1.7b) (Based on the trailing twelve months to September 2020).

Therefore, TSC Auto ID Technology has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Tech industry average of 12% it's much better.

Check out our latest analysis for TSC Auto ID Technology

In the above chart we have measured TSC Auto ID Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for TSC Auto ID Technology.

How Are Returns Trending?

On the surface, the trend of ROCE at TSC Auto ID Technology doesn't inspire confidence. Over the last five years, returns on capital have decreased to 18% from 39% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On TSC Auto ID Technology's ROCE

In summary, TSC Auto ID Technology is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 13% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Like most companies, TSC Auto ID Technology does come with some risks, and we've found 1 warning sign that you should be aware of.

While TSC Auto ID 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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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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