Is Emerging Display Technologies (TPE:3038) A Future Multi-bagger?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Emerging Display Technologies (TPE:3038) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Emerging Display Technologies, this is the formula:

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

0.17 = NT$354m ÷ (NT$3.9b - NT$1.8b) (Based on the trailing twelve months to September 2020).

So, Emerging Display Technologies has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 11% generated by the Electronic industry.

View our latest analysis for Emerging Display Technologies

Above you can see how the current ROCE for Emerging Display Technologies 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 Emerging Display Technologies here for free.

What The Trend Of ROCE Can Tell Us

Emerging Display Technologies is showing promise given that its ROCE is trending up and to the right. 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 128% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 47% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line On Emerging Display Technologies' ROCE

To sum it up, Emerging Display Technologies is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 157% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a separate note, we've found 3 warning signs for Emerging Display Technologies you'll probably want to know about.

While Emerging Display Technologies isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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