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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Ergo, when we looked at the ROCE trends at Focusrite (LON:TUNE), we liked what we saw.
Understanding 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. The formula for this calculation on Focusrite is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.27 = UK£28m ÷ (UK£133m - UK£30m) (Based on the trailing twelve months to February 2022).
Therefore, Focusrite has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Consumer Durables industry average of 12%.
See our latest analysis for Focusrite
In the above chart we have measured Focusrite'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 report for Focusrite.
What The Trend Of ROCE Can Tell Us
Focusrite deserves to be commended in regards to it's returns. Over the past five years, ROCE has remained relatively flat at around 27% and the business has deployed 254% more capital into its operations. Now considering ROCE is an attractive 27%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.
What We Can Learn From Focusrite's ROCE
Focusrite has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And the stock has done incredibly well with a 182% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.