If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Ergo, when we looked at the ROCE trends at Innodisk (GTSM:5289), we liked what we saw.
What is Return On Capital Employed (ROCE)?
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 Innodisk is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.27 = NT$1.3b ÷ (NT$5.7b - NT$853m) (Based on the trailing twelve months to September 2020).
Therefore, Innodisk has an ROCE of 27%. That's a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.
Check out our latest analysis for Innodisk
Above you can see how the current ROCE for Innodisk compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Innodisk here for free.
What Can We Tell From Innodisk's ROCE Trend?
It's hard not to be impressed by Innodisk's returns on capital. The company has employed 110% more capital in the last five years, and the returns on that capital have remained stable at 27%. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Innodisk can keep this up, we'd be very optimistic about its future.
In Conclusion...
In short, we'd argue Innodisk has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. On top of that, the stock has rewarded shareholders with a remarkable 170% return to those who've held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
Innodisk does have some risks though, and we've spotted 1 warning sign for Innodisk that you might be interested in.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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About TPEX:5289
Innodisk
Researches, develops, manufactures, and sales industrial embedded storage devices in Taiwan, Asia, Japan, Germany, China, Europe, the United States, and internationally.
Very undervalued with high growth potential.
