What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Centaur Media (LON:CAU) and its trend of ROCE, we really liked what we saw.

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. Analysts use this formula to calculate it for Centaur Media:

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

0.14 = UK£6.4m ÷ (UK£62m - UK£17m) (Based on the trailing twelve months to June 2024).

So, Centaur Media has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Media industry average of 10% it's much better.

View our latest analysis for Centaur Media

In the above chart we have measured Centaur Media's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Centaur Media .

What The Trend Of ROCE Can Tell Us

Like most people, we're pleased that Centaur Media is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 14% on their capital employed. In regards to capital employed, Centaur Media is using 37% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.

In Conclusion...

In the end, Centaur Media has proven it's capital allocation skills are good with those higher returns from less amount of capital. Since the stock has only returned 7.9% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

On a final note, we've found 3 warning signs for Centaur Media that we think you should be aware of.

While Centaur Media may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.