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There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. So when we looked at Computer Modelling Group (TSE:CMG), they do have a high ROCE, but we weren't exactly elated from how returns are trending.
Return On Capital Employed (ROCE): What Is It?
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 Computer Modelling Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.25 = CA$34m ÷ (CA$200m - CA$68m) (Based on the trailing twelve months to December 2024).
Therefore, Computer Modelling Group has an ROCE of 25%. That's a fantastic return and not only that, it outpaces the average of 15% earned by companies in a similar industry.
See our latest analysis for Computer Modelling Group
In the above chart we have measured Computer Modelling Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Computer Modelling Group .
What Does the ROCE Trend For Computer Modelling Group Tell Us?
When we looked at the ROCE trend at Computer Modelling Group, we didn't gain much confidence. To be more specific, while the ROCE is still high, it's fallen from 41% where it was five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 34%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 25%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.
The Bottom Line On Computer Modelling Group's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Computer Modelling Group is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 33% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.