To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Good Will Instrument (TPE:2423) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Good Will Instrument is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = NT$262m ÷ (NT$3.0b - NT$602m) (Based on the trailing twelve months to September 2020).
Thus, Good Will Instrument has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 10% 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 Good Will Instrument's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Good Will Instrument, check out these free graphs here.
What Does the ROCE Trend For Good Will Instrument Tell Us?
Good Will Instrument's ROCE growth is quite impressive. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 78% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
As discussed above, Good Will Instrument appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And with a respectable 85% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Like most companies, Good Will Instrument does come with some risks, and we've found 1 warning sign that you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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