If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. So while TalkMed Group (SGX:5G3) has a high ROCE right now, lets see what we can decipher from how returns are changing.

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. The formula for this calculation on TalkMed Group is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.48 = S$40m ÷ (S$106m - S$23m) (Based on the trailing twelve months to June 2023).

Therefore, TalkMed Group has an ROCE of 48%. That's a fantastic return and not only that, it outpaces the average of 11% earned by companies in a similar industry.

View 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 of past earnings, revenue and cash flow.

So How Is TalkMed Group's ROCE Trending?

Things have been pretty stable at TalkMed Group, with its capital employed and returns on that capital staying somewhat the same for the last 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 Bottom Line

Although is allocating it's capital efficiently to generate impressive returns, it isn't compounding its base of capital, which is what we'd see from a multi-bagger. Since the stock has declined 21% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think TalkMed Group has the makings of a multi-bagger.

If you want to know some of the risks facing TalkMed Group we've found 2 warning signs (1 is significant!) that you should be aware of before investing here.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.