Brave C&H SupplyLtd (GTSM:6538) Knows How To Allocate Capital Effectively

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. And in light of that, the trends we're seeing at Brave C&H SupplyLtd's (GTSM:6538) look very promising so lets take a look.

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. The formula for this calculation on Brave C&H SupplyLtd is:

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

0.35 = NT$685m ÷ (NT$2.4b - NT$511m) (Based on the trailing twelve months to September 2020).

Thus, Brave C&H SupplyLtd has an ROCE of 35%. That's a fantastic return and not only that, it outpaces the average of 11% earned by companies in a similar industry.

View our latest analysis for Brave C&H SupplyLtd

In the above chart we have measured Brave C&H SupplyLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Brave C&H SupplyLtd here for free.

What Can We Tell From Brave C&H SupplyLtd's ROCE Trend?

The trends we've noticed at Brave C&H SupplyLtd are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 35%. The amount of capital employed has increased too, by 55%. So we're very much inspired by what we're seeing at Brave C&H SupplyLtd thanks to its ability to profitably reinvest capital.

The Bottom Line

In summary, it's great to see that Brave C&H SupplyLtd 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. And a remarkable 131% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Brave C&H SupplyLtd can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 1 warning sign with Brave C&H SupplyLtd and understanding it should be part of your investment process.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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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