Does U-MEDIA Communications (GTSM:6470) Have The DNA Of A Multi-Bagger?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of U-MEDIA Communications (GTSM:6470) looks great, so lets see what the trend can tell us.

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 U-MEDIA Communications, this is the formula:

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

0.32 = NT$245m ÷ (NT$1.7b - NT$978m) (Based on the trailing twelve months to September 2020).

So, U-MEDIA Communications has an ROCE of 32%. That's a fantastic return and not only that, it outpaces the average of 9.8% earned by companies in a similar industry.

See our latest analysis for U-MEDIA Communications

Above you can see how the current ROCE for U-MEDIA Communications 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 U-MEDIA Communications here for free.

So How Is U-MEDIA Communications' ROCE Trending?

U-MEDIA Communications is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 32%. The amount of capital employed has increased too, by 42%. So we're very much inspired by what we're seeing at U-MEDIA Communications thanks to its ability to profitably reinvest capital.

Another thing to note, U-MEDIA Communications has a high ratio of current liabilities to total assets of 56%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From U-MEDIA Communications' ROCE

In summary, it's great to see that U-MEDIA Communications 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. Considering the stock has delivered 40% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

On a final note, we've found 2 warning signs for U-MEDIA Communications that we think you should be aware of.

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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