There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Co-Tech Development (GTSM:8358) and its trend of ROCE, we really liked what we saw.
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. Analysts use this formula to calculate it for Co-Tech Development:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = NT$739m ÷ (NT$6.7b - NT$1.4b) (Based on the trailing twelve months to December 2020).
So, Co-Tech Development has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 11% generated by the Electronic industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Co-Tech Development's ROCE against it's prior returns. If you're interested in investigating Co-Tech Development's past further, check out this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
We're delighted to see that Co-Tech Development 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 14% on its capital. In addition to that, Co-Tech Development is employing 73% more capital than previously which is expected of a company that's 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.
On a related note, the company's ratio of current liabilities to total assets has decreased to 20%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
The Bottom Line
To the delight of most shareholders, Co-Tech Development has now broken into profitability. And a remarkable 687% 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 Co-Tech Development can keep these trends up, it could have a bright future ahead.
On a separate note, we've found 2 warning signs for Co-Tech Development you'll probably want to know about.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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