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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Looking at TalkMed Group (SGX:5G3), it does have a high ROCE right now, but lets see how returns are trending.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on TalkMed Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.41 = S$33m ÷ (S$104m - S$24m) (Based on the trailing twelve months to June 2024).
So, TalkMed Group has an ROCE of 41%. That's a fantastic return and not only that, it outpaces the average of 7.7% earned by companies in a similar industry.
See our latest analysis for TalkMed Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for TalkMed Group's ROCE against it's prior returns. If you're interested in investigating TalkMed Group's past further, check out this free graph covering TalkMed Group's past earnings, revenue and cash flow.
So How Is TalkMed Group's ROCE Trending?
There hasn't been much to report for TalkMed Group's returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. Although current returns are high, we'd need more evidence of underlying growth for it to look like a multi-bagger going forward.
The Key Takeaway
While TalkMed Group has impressive profitability from its capital, it isn't increasing that amount of capital. Unsurprisingly, the stock has only gained 12% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
One final note, you should learn about the 2 warning signs we've spotted with TalkMed Group (including 1 which makes us a bit uncomfortable) .
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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.