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To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Tai Sin Electric's (SGX:500) returns on capital, so let's have a look.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Tai Sin Electric, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = S$22m ÷ (S$316m - S$94m) (Based on the trailing twelve months to June 2024).
Thus, Tai Sin Electric has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 8.2% it's much better.
Check out our latest analysis for Tai Sin Electric
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Tai Sin Electric's past further, check out this free graph covering Tai Sin Electric's past earnings, revenue and cash flow.
What Does the ROCE Trend For Tai Sin Electric Tell Us?
Investors would be pleased with what's happening at Tai Sin Electric. Over the last five years, returns on capital employed have risen substantially to 10%. Basically the business is earning more per dollar of capital invested and in addition to that, 24% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
The Key Takeaway
In summary, it's great to see that Tai Sin Electric can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 59% return over the last five years. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.