To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Crestchic (LON:LOAD) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What is it?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Crestchic, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = UK£3.8m ÷ (UK£43m - UK£12m) (Based on the trailing twelve months to December 2021).
So, Crestchic has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 13% generated by the Electrical industry.
Check out our latest analysis for Crestchic
In the above chart we have measured Crestchic's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Crestchic here for free.
So How Is Crestchic's ROCE Trending?
Like most people, we're pleased that Crestchic is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 12% on their capital employed. In regards to capital employed, Crestchic is using 43% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.
In Conclusion...
In a nutshell, we're pleased to see that Crestchic has been able to generate higher returns from less capital. Since the stock has returned a staggering 102% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
On a separate note, we've found 2 warning signs for Crestchic you'll probably want to know about.
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.