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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. So when we looked at ActiveOps (LON:AOM) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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 ActiveOps is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.049 = UK£451k ÷ (UK£21m - UK£12m) (Based on the trailing twelve months to September 2023).
So, ActiveOps has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Software industry average of 8.4%.
Check out our latest analysis for ActiveOps
Above you can see how the current ROCE for ActiveOps compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for ActiveOps .
What Can We Tell From ActiveOps' ROCE Trend?
ActiveOps has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 4.9% on its capital. And unsurprisingly, like most companies trying to break into the black, ActiveOps is utilizing 1,446% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
On a related note, the company's ratio of current liabilities to total assets has decreased to 57%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.
The Bottom Line
To the delight of most shareholders, ActiveOps has now broken into profitability. Given the stock has declined 51% in the last three years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.