There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. So on that note, T&S CommunicationsLtd (SZSE:300570) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for T&S CommunicationsLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = CN¥223m ÷ (CN¥1.7b - CN¥286m) (Based on the trailing twelve months to September 2023).
Thus, T&S CommunicationsLtd has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 5.1% generated by the Communications industry.
SZSE:300570 Return on Capital Employed March 22nd 2024
Above you can see how the current ROCE for T&S CommunicationsLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering T&S CommunicationsLtd for free.
The Trend Of ROCE
T&S CommunicationsLtd's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 63% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
The Bottom Line On T&S CommunicationsLtd's ROCE
As discussed above, T&S CommunicationsLtd appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 92% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
One final note, you should learn about the 3 warning signs we've spotted with T&S CommunicationsLtd (including 1 which is significant) .
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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