To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Triumph Science & TechnologyLtd (SHSE:600552) and its trend of ROCE, we really liked what we saw.
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. Analysts use this formula to calculate it for Triumph Science & TechnologyLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.018 = CN¥107m ÷ (CN¥11b - CN¥4.6b) (Based on the trailing twelve months to September 2023).
Therefore, Triumph Science & TechnologyLtd has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.3%.
Above you can see how the current ROCE for Triumph Science & TechnologyLtd 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 Triumph Science & TechnologyLtd for free.
What The Trend Of ROCE Can Tell Us
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 1.8%. The amount of capital employed has increased too, by 65%. So we're very much inspired by what we're seeing at Triumph Science & TechnologyLtd thanks to its ability to profitably reinvest capital.
Another thing to note, Triumph Science & TechnologyLtd has a high ratio of current liabilities to total assets of 44%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Triumph Science & TechnologyLtd has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 63% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.
If you'd like to know more about Triumph Science & TechnologyLtd, we've spotted 3 warning signs, and 1 of them 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.