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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. With that in mind, we've noticed some promising trends at Caffyns (LON:CFYN) so let's look a bit deeper.
Understanding 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 Caffyns:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.07 = UK£3.6m ÷ (UK£84m - UK£33m) (Based on the trailing twelve months to September 2021).
Thus, Caffyns has an ROCE of 7.0%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 15%.
Check out our latest analysis for Caffyns
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 Caffyns' past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
Caffyns is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 61% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
Our Take On Caffyns' ROCE
To sum it up, Caffyns is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has only returned 29% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
One more thing: We've identified 3 warning signs with Caffyns (at least 1 which is a bit unpleasant) , and understanding these would certainly be useful.