Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Although, when we looked at Triumph Science & TechnologyLtd (SHSE:600552), it didn't seem to tick all of these boxes.
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. 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)
0.0045 = CN¥26m ÷ (CN¥10b - CN¥4.5b) (Based on the trailing twelve months to March 2024).
Thus, Triumph Science & TechnologyLtd has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.2%.
In the above chart we have measured Triumph Science & TechnologyLtd's prior ROCE against its prior performance, but the future is arguably more important. 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
On the surface, the trend of ROCE at Triumph Science & TechnologyLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 0.5% from 3.9% five years ago. However it looks like Triumph Science & TechnologyLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
Another thing to note, Triumph Science & TechnologyLtd has a high ratio of current liabilities to total assets of 44%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
What We Can Learn From Triumph Science & TechnologyLtd's ROCE
Bringing it all together, while we're somewhat encouraged by Triumph Science & TechnologyLtd's reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 105% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
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.
While Triumph Science & TechnologyLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.