There are a few key trends to look for if we want to identify the next 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 when we looked at CTI Logistics (ASX:CLX) 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 CTI Logistics, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = AU$32m ÷ (AU$219m - AU$50m) (Based on the trailing twelve months to December 2022).
Therefore, CTI Logistics has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Logistics industry average of 13% it's much better.
View our latest analysis for CTI Logistics
Historical performance is a great place to start when researching a stock so above you can see the gauge for CTI Logistics' ROCE against it's prior returns. If you'd like to look at how CTI Logistics has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From CTI Logistics' ROCE Trend?
The trends we've noticed at CTI Logistics are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 19%. Basically the business is earning more per dollar of capital invested and in addition to that, 21% more capital is being employed now too. So we're very much inspired by what we're seeing at CTI Logistics thanks to its ability to profitably reinvest capital.
What We Can Learn From CTI Logistics' ROCE
In summary, it's great to see that CTI Logistics can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a solid 83% 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.
One more thing, we've spotted 2 warning signs facing CTI Logistics that you might find interesting.