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To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. And in light of that, the trends we're seeing at Computacenter's (LON:CCC) look very promising so lets take a look.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Computacenter, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.27 = UK£254m ÷ (UK£2.7b - UK£1.8b) (Based on the trailing twelve months to December 2021).
Therefore, Computacenter has an ROCE of 27%. That's a fantastic return and not only that, it outpaces the average of 8.7% earned by companies in a similar industry.
View our latest analysis for Computacenter
In the above chart we have measured Computacenter's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Computacenter here for free.
How Are Returns Trending?
The trends we've noticed at Computacenter are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 27%. Basically the business is earning more per dollar of capital invested and in addition to that, 113% more capital is being employed now too. So we're very much inspired by what we're seeing at Computacenter thanks to its ability to profitably reinvest capital.
On a separate but related note, it's important to know that Computacenter has a current liabilities to total assets ratio of 66%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Computacenter has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.