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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? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, 1Spatial (LON:SPA) looks quite promising in regards to its trends of return on capital.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for 1Spatial:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = UK£2.4m ÷ (UK£38m - UK£14m) (Based on the trailing twelve months to July 2024).
Therefore, 1Spatial has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 12% generated by the IT industry.
See our latest analysis for 1Spatial
Above you can see how the current ROCE for 1Spatial 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 1Spatial for free.
What Does the ROCE Trend For 1Spatial Tell Us?
Shareholders will be relieved that 1Spatial has broken into profitability. The company now earns 10% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
Our Take On 1Spatial's ROCE
In summary, we're delighted to see that 1Spatial has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a staggering 154% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
One more thing to note, we've identified 2 warning signs with 1Spatial and understanding these should be part of your investment process.