There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. With that in mind, we’ve noticed some promising trends at High-Tek Harness Enterprise (GTSM:3202) so let’s look a bit deeper.
What is 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. To calculate this metric for High-Tek Harness Enterprise, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.079 = NT$195m ÷ (NT$4.3b – NT$1.8b) (Based on the trailing twelve months to September 2020).
So, High-Tek Harness Enterprise has an ROCE of 7.9%. Ultimately, that’s a low return and it under-performs the Tech industry average of 12%.
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’d like to look at how High-Tek Harness Enterprise has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For High-Tek Harness Enterprise Tell Us?
High-Tek Harness Enterprise has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it’s now earning 7.9% on its capital. Not only that, but the company is utilizing 98% more capital than before, but that’s to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
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. Ideally we’d like to see this reduce as that would mean fewer obligations bearing risks.
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 245% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.
High-Tek Harness Enterprise does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is a bit unpleasant…
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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