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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Altitude Group (LON:ALT) looks quite promising in regards to its trends of return on capital.
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 Altitude Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.044 = UK£465k ÷ (UK£14m - UK£3.7m) (Based on the trailing twelve months to September 2023).
Therefore, Altitude Group has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Software industry average of 9.8%.
View our latest analysis for Altitude Group
Above you can see how the current ROCE for Altitude Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Altitude Group for free.
What Does the ROCE Trend For Altitude Group Tell Us?
The fact that Altitude Group is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 4.4% which is a sight for sore eyes. Not only that, but the company is utilizing 141% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
The Key Takeaway
In summary, it's great to see that Altitude Group has managed to break into profitability and is continuing to reinvest in its business. And since the stock has fallen 64% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
If you'd like to know about the risks facing Altitude Group, we've discovered 5 warning signs that you should be aware of.
While Altitude Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.