There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at CeoTronics (FRA:CEK) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for CeoTronics, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = €3.9m ÷ (€29m - €8.7m) (Based on the trailing twelve months to May 2023).
Therefore, CeoTronics has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 13% generated by the Communications industry.
Check out our latest analysis for CeoTronics
Above you can see how the current ROCE for CeoTronics 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 CeoTronics.
The Trend Of ROCE
CeoTronics has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 19% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, CeoTronics is utilizing 44% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
The Bottom Line On CeoTronics' ROCE
In summary, it's great to see that CeoTronics has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a staggering 148% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if CeoTronics can keep these trends up, it could have a bright future ahead.
One more thing, we've spotted 2 warning signs facing CeoTronics that you might find interesting.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.