If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Speaking of which, we noticed some great changes in Sharps Compliance's (NASDAQ:SMED) returns on capital, so let's have a look.
What is 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 Sharps Compliance is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = US$12m ÷ (US$90m - US$16m) (Based on the trailing twelve months to September 2021).
So, Sharps Compliance has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 12% generated by the Healthcare industry.
View our latest analysis for Sharps Compliance
In the above chart we have measured Sharps Compliance's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Sharps Compliance's ROCE Trend?
We're delighted to see that Sharps Compliance is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 16% on its capital. And unsurprisingly, like most companies trying to break into the black, Sharps Compliance is utilizing 163% more capital than it was five years ago. 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.
In Conclusion...
To the delight of most shareholders, Sharps Compliance has now broken into profitability. Since the stock has returned a solid 82% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
On a final note, we found 2 warning signs for Sharps Compliance (1 doesn't sit too well with us) you should be aware of.