To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. In light of that, when we looked at Ping Ho Environmental Technology Company (GTSM:6771) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Ping Ho Environmental Technology Company:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = NT$142m ÷ (NT$1.3b - NT$260m) (Based on the trailing twelve months to June 2020).
Thus, Ping Ho Environmental Technology Company has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Water Utilities industry average of 7.2% it's much better.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Ping Ho Environmental Technology Company, check out these free graphs here.
The Trend Of ROCE
When we looked at the ROCE trend at Ping Ho Environmental Technology Company, we didn't gain much confidence. Around three years ago the returns on capital were 18%, but since then they've fallen to 14%. However it looks like Ping Ho Environmental Technology Company might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line On Ping Ho Environmental Technology Company's ROCE
Bringing it all together, while we're somewhat encouraged by Ping Ho Environmental Technology Company's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly then, the total return to shareholders over the last year has been flat. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
Like most companies, Ping Ho Environmental Technology Company does come with some risks, and we've found 3 warning signs that you should be aware of.
While Ping Ho Environmental Technology Company may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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