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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? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in CPI Card Group's (NASDAQ:PMTS) returns on capital, so let's have a look.
What Is Return On Capital Employed (ROCE)?
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. The formula for this calculation on CPI Card Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.23 = US$63m ÷ (US$350m - US$76m) (Based on the trailing twelve months to December 2024).
Thus, CPI Card Group has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Tech industry average of 11%.
Check out our latest analysis for CPI Card Group
Above you can see how the current ROCE for CPI Card Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering CPI Card Group for free.
What Does the ROCE Trend For CPI Card Group Tell Us?
We like the trends that we're seeing from CPI Card Group. Over the last five years, returns on capital employed have risen substantially to 23%. Basically the business is earning more per dollar of capital invested and in addition to that, 60% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
The Key Takeaway
In summary, it's great to see that CPI Card Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if CPI Card Group can keep these trends up, it could have a bright future ahead.
If you'd like to know more about CPI Card Group, we've spotted 2 warning signs, and 1 of them is a bit unpleasant.