There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at BenQ Medical Technology (GTSM:4116), it didn’t seem to tick all of these boxes.
Return On Capital Employed (ROCE): What is it?
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. To calculate this metric for BenQ Medical Technology, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.068 = NT$90m ÷ (NT$1.7b – NT$415m) (Based on the trailing twelve months to September 2020).
So, BenQ Medical Technology has an ROCE of 6.8%. Ultimately, that’s a low return and it under-performs the Medical Equipment industry average of 12%.
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 BenQ Medical Technology, check out these free graphs here.
So How Is BenQ Medical Technology’s ROCE Trending?
In terms of BenQ Medical Technology’s historical ROCE trend, it doesn’t exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 6.8% and the business has deployed 77% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don’t provide a high return on capital.
What We Can Learn From BenQ Medical Technology’s ROCE
As we’ve seen above, BenQ Medical Technology’s returns on capital haven’t increased but it is reinvesting in the business. And investors appear hesitant that the trends will pick up because the stock has fallen 47% in the last five years. Therefore based on the analysis done in this article, we don’t think BenQ Medical Technology has the makings of a multi-bagger.
BenQ Medical Technology does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those doesn’t sit too well with us…
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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