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What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So, when we ran our eye over Supply Network's (ASX:SNL) trend of ROCE, we really liked what we saw.
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. Analysts use this formula to calculate it for Supply Network:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.33 = AU$41m ÷ (AU$169m - AU$46m) (Based on the trailing twelve months to June 2023).
Therefore, Supply Network has an ROCE of 33%. In absolute terms that's a great return and it's even better than the Retail Distributors industry average of 8.9%.
See our latest analysis for Supply Network
In the above chart we have measured Supply Network'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 Supply Network here for free.
What The Trend Of ROCE Can Tell Us
In terms of Supply Network's history of ROCE, it's quite impressive. The company has employed 214% more capital in the last five years, and the returns on that capital have remained stable at 33%. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Supply Network can keep this up, we'd be very optimistic about its future.
Our Take On Supply Network's ROCE
In summary, we're delighted to see that Supply Network has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And the stock has done incredibly well with a 342% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
On a final note, we've found 2 warning signs for Supply Network that we think you should be aware of.
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.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.