Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Perfect Shape Medical (HKG:1830) looks attractive right now, so lets see what the trend of returns can tell us.
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. The formula for this calculation on Perfect Shape Medical is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.31 = HK$318m ÷ (HK$1.5b – HK$490m) (Based on the trailing twelve months to September 2020).
Thus, Perfect Shape Medical has an ROCE of 31%. That’s a fantastic return and not only that, it outpaces the average of 9.3% 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 Perfect Shape Medical’s ROCE against it’s prior returns. If you want to delve into the historical earnings, revenue and cash flow of Perfect Shape Medical, check out these free graphs here.
What Does the ROCE Trend For Perfect Shape Medical Tell Us?
We’d be pretty happy with returns on capital like Perfect Shape Medical. The company has consistently earned 31% for the last five years, and the capital employed within the business has risen 105% in that time. Now considering ROCE is an attractive 31%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Perfect Shape Medical can keep this up, we’d be very optimistic about its future.
Our Take On Perfect Shape Medical’s ROCE
In summary, we’re delighted to see that Perfect Shape Medical has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And the stock has done incredibly well with a 512% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
On a final note, we’ve found 3 warning signs for Perfect Shape Medical that we think you should be aware of.
If you’d like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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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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