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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at CCL Industries (TSE:CCL.B) and its ROCE trend, we weren't exactly thrilled.
Understanding 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 CCL Industries:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = CA$771m ÷ (CA$7.3b - CA$1.3b) (Based on the trailing twelve months to December 2020).
So, CCL Industries has an ROCE of 13%. By itself that's a normal return on capital and it's in line with the industry's average returns of 13%.
See our latest analysis for CCL Industries
Above you can see how the current ROCE for CCL Industries 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 CCL Industries here for free.
What Can We Tell From CCL Industries' ROCE Trend?
When we looked at the ROCE trend at CCL Industries, we didn't gain much confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 13%. However it looks like CCL Industries might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
In Conclusion...
To conclude, we've found that CCL Industries is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 60% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
If you'd like to know about the risks facing CCL Industries, we've discovered 2 warning signs that you should be aware of.
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.
This article by Simply Wall St is general in nature. 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.
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