Is Asia Electronic Material (GTSM:4939) A Future Multi-bagger?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Speaking of which, we noticed some great changes in Asia Electronic Material's (GTSM:4939) returns on capital, so let's have a look.

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. The formula for this calculation on Asia Electronic Material is:

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

0.10 = NT$176m ÷ (NT$2.7b - NT$1.0b) (Based on the trailing twelve months to September 2020).

Thus, Asia Electronic Material has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Electronic industry average of 11%.

See our latest analysis for Asia Electronic Material

Historical performance is a great place to start when researching a stock so above you can see the gauge for Asia Electronic Material's ROCE against it's prior returns. If you're interested in investigating Asia Electronic Material's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Asia Electronic Material's ROCE Trending?

We're delighted to see that Asia Electronic Material 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 10% on its capital. Not only that, but the company is utilizing 23% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

The Bottom Line

Long story short, we're delighted to see that Asia Electronic Material's reinvestment activities have paid off and the company is now profitable. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Asia Electronic Material can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing Asia Electronic Material, we've discovered 2 warning signs that you should be aware of.

While Asia Electronic Material 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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