What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. 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, we’ve noticed some promising trends at Singatron Enterprise (GTSM:6126) so let’s look a bit deeper.
Understanding 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. The formula for this calculation on Singatron Enterprise is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.18 = NT$420m ÷ (NT$3.9b – NT$1.5b) (Based on the trailing twelve months to September 2020).
So, Singatron Enterprise has an ROCE of 18%. In absolute terms, that’s a satisfactory return, but compared to the Electronic industry average of 11% it’s much better.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Singatron Enterprise’s ROCE against it’s prior returns. If you’re interested in investigating Singatron Enterprise’s past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
The fact that Singatron Enterprise is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it’s now earning 18% on its capital. In addition to that, Singatron Enterprise is employing 24% more capital than previously which is expected of a company that’s 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.
What We Can Learn From Singatron Enterprise’s ROCE
To the delight of most shareholders, Singatron Enterprise has now broken into profitability. Since the stock has returned a staggering 264% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it’s worth looking further into this stock because if Singatron Enterprise can keep these trends up, it could have a bright future ahead.
If you’d like to know about the risks facing Singatron Enterprise, we’ve discovered 1 warning sign that you should be aware of.
While Singatron Enterprise 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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