If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think CTOS Digital Berhad (KLSE:CTOS) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What Is 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. To calculate this metric for CTOS Digital Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = RM75m ÷ (RM728m - RM73m) (Based on the trailing twelve months to March 2023).
Thus, CTOS Digital Berhad has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 10% generated by the Professional Services industry.
See our latest analysis for CTOS Digital Berhad
Above you can see how the current ROCE for CTOS Digital Berhad 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 report for CTOS Digital Berhad.
What Does the ROCE Trend For CTOS Digital Berhad Tell Us?
In terms of CTOS Digital Berhad's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 47% over the last four years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
On a related note, CTOS Digital Berhad has decreased its current liabilities to 10% of total assets. So we could link some of this to the decrease in ROCE. 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 CTOS Digital Berhad's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that CTOS Digital Berhad is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 15% to shareholders over the last year. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.