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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating CEMATRIX (TSE:CEMX), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on CEMATRIX is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.041 = CA$1.6m ÷ (CA$42m - CA$4.0m) (Based on the trailing twelve months to September 2024).
Therefore, CEMATRIX has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 13%.
View our latest analysis for CEMATRIX
Above you can see how the current ROCE for CEMATRIX compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for CEMATRIX .
What The Trend Of ROCE Can Tell Us
We weren't thrilled with the trend because CEMATRIX's ROCE has reduced by 29% over the last five years, while the business employed 155% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence CEMATRIX might not have received a full period of earnings contribution from it.
On a side note, CEMATRIX has done well to pay down its current liabilities to 9.5% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
The Bottom Line On CEMATRIX's ROCE
Bringing it all together, while we're somewhat encouraged by CEMATRIX's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 20% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.