If you’re looking for a multi-bagger, there’s a few things to keep an eye out for. 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. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. Looking at Planet Technology (GTSM:6263), it does have a high ROCE right now, but lets see how returns are trending.
Understanding Return On Capital Employed (ROCE)
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. The formula for this calculation on Planet Technology is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.25 = NT$328m ÷ (NT$1.6b – NT$274m) (Based on the trailing twelve months to September 2020).
Thus, Planet Technology has an ROCE of 25%. That’s a fantastic return and not only that, it outpaces the average of 9.8% earned by companies in a similar industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Planet Technology’s ROCE against it’s prior returns. If you want to delve into the historical earnings, revenue and cash flow of Planet Technology, check out these free graphs here.
What Can We Tell From Planet Technology’s ROCE Trend?
There hasn’t been much to report for Planet Technology’s returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they’re past the growth phase. So it may not be a multi-bagger in the making, but given the decent 25% return on capital, it’d be difficult to find fault with the business’s current operations.
In summary, Planet Technology isn’t compounding its earnings but is generating decent returns on the same amount of capital employed. Investors must think there’s better things to come because the stock has knocked it out of the park, delivering a 121% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn’t hold our breath on it being a multi-bagger going forward.
Planet Technology does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those doesn’t sit too well with us…
Planet Technology is not the only stock earning high returns. If you’d like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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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