If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 Blancco Technology Group (LON:BLTG) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Blancco Technology Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.028 = UK£2.2m ÷ (UK£87m - UK£8.2m) (Based on the trailing twelve months to December 2021).
Thus, Blancco Technology Group has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Software industry average of 8.3%.
Check out our latest analysis for Blancco Technology Group
In the above chart we have measured Blancco Technology Group'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 Blancco Technology Group here for free.
What Can We Tell From Blancco Technology Group's ROCE Trend?
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 2.8%. The amount of capital employed has increased too, by 24%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 9.5%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Blancco Technology Group has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
Our Take On Blancco Technology Group's ROCE
To sum it up, Blancco Technology Group has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has only returned 13% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.