There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So when we looked at High-Tek Harness Enterprise (GTSM:3202) 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. Analysts use this formula to calculate it for High-Tek Harness Enterprise:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.045 = NT$85m ÷ (NT$3.2b – NT$1.4b) (Based on the trailing twelve months to March 2020).
Thus, High-Tek Harness Enterprise has an ROCE of 4.5%. Ultimately, that’s a low return and it under-performs the Tech industry average of 9.5%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for High-Tek Harness Enterprise’s ROCE against it’s prior returns. If you’re interested in investigating High-Tek Harness Enterprise’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 High-Tek Harness Enterprise is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it’s earning 4.5% which is a sight for sore eyes. In addition to that, High-Tek Harness Enterprise is employing 44% 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 separate but related note, it’s important to know that High-Tek Harness Enterprise has a current liabilities to total assets ratio of 42%, which we’d consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it’s not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line
Long story short, we’re delighted to see that High-Tek Harness Enterprise’s reinvestment activities have paid off and the company is now profitable. And a remarkable 134% 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 High-Tek Harness Enterprise can keep these trends up, it could have a bright future ahead.
High-Tek Harness Enterprise does have some risks, we noticed 4 warning signs (and 1 which doesn’t sit too well with us) we think you should know about.
While High-Tek Harness Enterprise 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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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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