There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Unitech Computer (TPE:2414) and its ROCE trend, we weren’t exactly thrilled.
Return On Capital Employed (ROCE): What is it?
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. The formula for this calculation on Unitech Computer is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.12 = NT$410m ÷ (NT$8.2b – NT$4.8b) (Based on the trailing twelve months to June 2020).
Thus, Unitech Computer has an ROCE of 12%. That’s a relatively normal return on capital, and it’s around the 11% generated by the Tech industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Unitech Computer’s ROCE against it’s prior returns. If you want to delve into the historical earnings, revenue and cash flow of Unitech Computer, check out these free graphs here.
What Can We Tell From Unitech Computer’s ROCE Trend?
Over the past five years, Unitech Computer’s ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they’re past the growth phase. So unless we see a substantial change at Unitech Computer in terms of ROCE and additional investments being made, we wouldn’t hold our breath on it being a multi-bagger.
Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn’t increased to 59% of total assets, this reported ROCE would probably be less than12% because total capital employed would be higher.The 12% ROCE could be even lower if current liabilities weren’t 59% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.
In a nutshell, Unitech Computer has been trudging along with the same returns from the same amount of capital over the last five years. Investors must think there’s better things to come because the stock has knocked it out of the park delivering a 127% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn’t high.
On a final note, we found 3 warning signs for Unitech Computer (2 are concerning) you should be aware of.
While Unitech Computer 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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